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Prediction Markets move into the forecasting mainstream


Prediction Markets move into the forecasting mainstream as a "specialists’ market [that] is smarter than the broader and more turbulence susceptible big markets," thereby "attracting significant event risk monitoring attention and that it will tend to reflect presumptions driving some of the ‘smart’ money at play in broader markets."

Prediction Markets have been of interest to me ever since DARPA's excellent, but politically tone deaf, Policy Analysis Market (PAM) was pulled down in less than a day due to misplaced Congressional criticism. (A future's contract on the assassination of Jordan's King Abdullah was one of PAM's launching examples; very pertinent but very tone deaf - typical of Poindexter, resulting in his resignation.) See: Avian Flu emerges as the new lighting rod for predictive futures markets, Dec 2005.

Speculation over Poindexter's departure spawned its own prediction market:

Ironically, the aftermath of the DARPA controversy provided a vivid illustration of the power of markets to provide information about probabilities of future events. An offshore betting exchange,, listed a new security that would pay $100 if the head of DARPA, Admiral John Poindexter, was ousted by the end of August 2003. Early trading suggested a likelihood of resignation by the end of August of 40 percent, and price fluctuations reflected ongoing news developments. Around lunchtime on July 31, reports started citing credible Pentagon insiders who claimed knowledge of an impending resignation. Within minutes of this news first surfacing (and hours before it became widely known), the price spiked to around 80. These reports left the date of Poindexter’s proposed departure uncertain, which explains the remaining risk. As August dragged on, the price slowly fell back toward 50. On August 12, Poindexter then issued a letter of resignation suggesting that he would resign on August 29. On the 12th, the market rose sharply, closing at a price of 96.

Intrade's futures contracts on the date of the first Avian Flu infection in the US struck me as an excellent bit of informed prediction that could better the received wisdom of pundits and self-styled experts. See Prediction without accountability: calling the expertise and honesty of expert predictors into question, January, 2006

I agree with a colleague's assessment of Intrade (private note):

INTRADE is functioning like a window into one of the better informed layers of a global commodity market where there are in effect tiered levels of insight into events that will drive global pricing. (Metal traders know more than screen traders, metal producers know most of all especially in getting ahead of LME inventory relevant events.) We’ve seen political events play out in crude pricing, LA government policy affect sovereign credit spreads or Chinese tax changes affect metal pricing.

Wolfers and Zitzewitz describe this form of Prediction Market as:

markets where participants trade in contracts whose payoff depends on unknown future events. Much of the enthusiasm for prediction markets derives from the efficient markets hypothesis. In a truly efficient prediction market, the market price will be the best predictor of the event, and no combination of available polls or other information can be used to improve on the market-generated forecasts. This statement does not require that all individuals in a market be rational, as long as the marginal trade in the market is motivated by rational traders. Of course, it is unlikely that prediction markets are literally efficient, but a number of successes in these markets, both with regard to public events like presidential elections and within firms, have generated substantial interest...

The basic forms of these relevant contracts will reveal the market’s expectation of a specific parameter: a probability, mean or median, respectively. But in addition, prediction markets can also be used to evaluate uncertainty about these expectations.

These probability, mean or median type contracts are differentiated:

  1. Probability: "winner-takeall" contract, the contract costs some amount $p and pays off, say, $1 if and only if a specific event occurs, like a particular candidate winning an election. The price on a winner-take-all market represents the market’s expectation of the probability that an event will occur (assuming risk neutrality)...
  2. Mean: "index" contract, the amount that the contract pays varies in a continuous way based on a number that rises or falls, like the percentage of the vote received by a candidate. The price for such a contract represents the mean value that the market assigns to the outcome...
  3. Median: "spread" betting, traders differentiate themselves by bidding on the cutoff that determines whether an event occurs, like whether a candidate receives more than a certain percentage of the popular vote.

Corporate forecasting, dodgy in all but the best of cases, should be able to benefit from internal Prediction Markets that tap the incipient organization (how work gets done) within a firm as opposed to its organizational chart (how work is theoretically done):

Spengler’s state birth stage is the organizational incipient stage, when a nucleus of highly competent/motivated individuals join to perform a task, each knowing and depending upon the other. High performance teams are incipient organizations within larger, often sclerotic, organizations. I maintain that incipients reform out of desperation, if nothing else, than to build the "Go-to" network where timely, accurate answers can be found. Incipient organizations that reside within larger networks maintain contact with, and relationship to, the larger group, but are often invisible and many of its members do not even recognize that they are seen as a key node by others. (I have seen instances where a less competent external party recognizes an incipient member and leaches off their knowledge without recompense or recognition.)

My colleague was on the same ground (private note):

[The] application of expert insight capture to Mittal’s internal price planning, [which when combined with] internal web logs seems to me to be very interesting uses of IT to radically flatten senior management’s access to real in-house expertise that is otherwise usually out of reach. It is not necessarily high value insight but it is probably better to have it than forego it. It is probably not enough to satisfy a reputation risk objective, such as a Know Your [X] due diligence requirement.

Used wisely, the combination of internal prediction markets and other tools has the potential of revealing potent social networks that could (should) become the basis for employee elevation. (See the Krebs social networking items in Globally dispersed, indigenously sited communities of terrorists upgrading to locally produced chembio agents, Nov 2006.)

I am not alone in predicting that this 'wisdom of specialized crowds' will be closely watched. With regards to its use as predictor of 2008 presidental and Congressional seats, I immediately wondered to colleagues:

how it can be spoofed so as to skew the results, thereby possibly influencing the pundits, who might then influence the electorate. If one is willing to 'lose money' on the trade, there is the possibility of gaining the 'greater good' of your candidate's victory. The first comment in the readers reply to Leonhardt's article speaks to the same idea.

Reader Responses to the Column
New York Times

Published: February 14, 2007

Odds Are, They’ll Know ’08 Winner
New York Times
February 14, 2007

Prediction Markets
Justin Wolfers and Eric Zitzewitz
Journal of Economic Perspectives, Volume 18, Number 2, Pages 107
Spring 2004

The Furor Over 'Terrorism Futures'
By Justin Wolfers and Eric Zitzewitz
Washington Post
Thursday, July 31, 2003

If This Is Harebrained, Bet on the Hare
Michael Schrage and Sam Savage
Washington Post
August 3, 2003
Original scrolled to archive

Gordon Housworth

InfoT Public  Risk Containment and Pricing Public  


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A Chinese Catch-22: the implausibility of plausible denial


If you or your firm does business in China, successfully or relentlessly in pursuit of profit, your firm and likely yourself or one or more individuals in your reporting stream is guilty of violating the US Foreign Corrupt Practices Act (FCPA). The only barriers to discovery are a Chinese arrest of your counterparty for reasons internal to the Chinese, perhaps an anti-corruption drive or an official's fall from favor, and a US warrant against you or your firm for actions with Chinese entities that are deemed illegal under US law.

In a perfect Catch-22 (also here), it is highly likely that you can't even operate in China without violating the Act, especially so when one understands the pervasive nature of purchasing favor in China, even among Chinese. Rich Kuslan offers a nice introduction (and also has a good money laundering series, parts 1, 2, 3):

The idea that one must buy favor permeates Chinese society, even down to the lunch offered by a family member asking for assistance. But bribery and the [FCPA] do not mix well. Since most commercial transactions can not be accomplished in China without the former, in one form or another, the latter tends to suffer when sales figures must be met. As to the actual payment of moneys, most corporations in China who fork it over do not do so directly, but instead make use of third (and fourth) parties -- often foist upon them by potential customers, but sometimes selected. Payments may be made within China or even overseas through a wide range of entities that may help mask the payment. One can be as sure of crisp US $100 bills in a satchel as often as numbered Swiss accounts.

An important note: the use of agents does not necessarily shield the American executive from prosecution. Actual knowledge that a payment or a promise to pay will be forwarded to an official is not required: constructive knowledge -- you "should have" known, given the facts -- can make the exec just as liable.

And is it even debatable that [Zhang Enzhao at China Construction Bank] is an official for the purposes of the FCPA, when the CCB is a quasi-governmental organ of the state of China? The [principal purchaser] in China remains the state. How does the exec defend foregoing a big sale to a quasi-governmental organ and a payment to its key decision-maker in a market your headquarters believes will save the company?

For those of us with a long history with the FCPA, 1998 separates what many call FCPA I and FCPA II. The essence is plausible deniability in connection to a prohibited act. Among the "Prohibited foreign trade practices by domestic concerns" there had long been statute, to wit:

(3) any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official, to any foreign political party or official thereof, or to any candidate for foreign political office, for purposes of-- influencing... inducing...

The 1998 amendments to what is now called "FCPA I" strengthened the definition of "knowing" such that "FCPA II" removed plausible denial with:

(A) A person's state of mind is "knowing" with respect to conduct, a circumstance, or a result if--
(i) such person is aware that such person is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or
(ii) such person has a firm belief that such circumstance exists or that such result is substantially certain to occur.

All accounts indicate that DoJ is ramping up its enforcement efforts. In 2005, Assistant Attorney General Christopher Wray flagged a rise in FCPA cases:

Even today, attitudes toward that kind of conduct vary widely among executives around the world and, unfortunately, right here at home. Some folks persist in thinking that bribery is just a cost of doing business in certain countries. The problem is, these bribes undermine exactly what the Corporate Fraud Task Force is intent on restoring: public confidence in the integrity of American business. Under-thetable bribes distort the playing field and hide the truth from the public...

First, the SEC has significantly stepped up enforcement of the FCPA's civil provisions against publicly held companies... Second, we're seeing more cooperation from anti-bribery investigators and prosecutors around the world. That kind of cooperation is essential because these are often tough cases to make. Evidence of the bribe is often located abroad - sometimes in the very country whose officials have been bribed. And these matters are almost always politically sensitive. Our investigators rely on the good graces and cooperation of our international partners... Finally, we're seeing many more companies disclose FCPA violations voluntarily [as] companies are getting the message that we're serious about rooting out illegal corporate conduct...

As a theater operator, I'd often seen the situation that Rich describes as:

[When] senior management passes out copies of the FCPA -- with the notation in biro "read this and make sure you do not violate this law," [it] does not mean they care whether you violate the law, but just that they don't.)

Given the propensity of DoJ to prosecute corporately and individually, I think that it is no longer be sufficient to attempt to remain at arm's length while leaving subordinates at risk. Given the FCPA risks of doing business in China, I think that it will be increasingly difficult to satisfy Rich's admonition:

If you have not seriously considered it before, now is the time to give serious consideration to the value of risky behavior in light of the demands presented by the FCPA, the DOJ and, now, it appears, the Chinese government.

My export sales operated extensively under FCPA I. I think it reasonable to assume said work would not pass FCPA II scrutiny for plausible denial. By the same token, I do not believe that any current Chinese operation could withstand the rigorous scrutiny of FCPA II. The result is discretionary enforcement waiting to happen from either Chinese or US authorities; the counterparty becoming collateral damage to the exposure.

General comments on compliance with FCPA and other statutes

My commercial dealings in Central and South America, Africa, the Middle East, India, and Indonesia painted an intriguing picture of financial compensation through a 'supply chain' of actors in which one could obey FCPA I with modest effort. Most interestingly, China was not then an issue for us as we possessed a high value technology (Computer Aided Design (CAD)) slowly emerging from embargo coupled with then nascent commercial IP collection. In fact, we had competing suitors within China to secure a commercial relationship with us. (The issue rose to the point that these competing groups would, in turn, call me to the embassy in Washington to berate me for dealing with the other party.) Contrasting our preferential treatment, even in the 80s, I saw what happened when the Chinese considered a product more a commodity than a specialty. The commercial terms offered to those vendors were immediately tough.

I have a special memory of the landing of the first space shuttle, STS-1 Columbia, on 14 April, 1981, as I spent the day in Brasilia being hit up for a bribe by a government functionary who became increasingly more exasperated and blunt as I feigned no understanding of his real request. I could afford to be politely obtuse as I already had the means to get our systems past the clutch of Brazilian customs. One would have to be derelict not to understand the empire that was Brazilian customs, or to be unaware of the elegant apartment blocks outside Rio that housed ostensibly low level customs officers. The fact that my client was another government agency made no difference to customs, but it did offer a workaround. We shipped the systems to an airbase in the US where it was transferred to a Brazilian military aircraft which delivered the equipment to an airbase within Brazil. A domestic flight back to the coast outflanked Brazilian customs. One may surmise that there were costs associated with that transit but they were opaque to me and were considered acceptable by all local parties on our side.

Save for the Republic of South Africa (RSA) then under Apartite government and possessed of its own special issues, there was no country in Africa that was free of extralegal payment demands. I sympathize with anyone doing business on the continent as, even with layers of intermediaries, I would not like to endure an FCPA II deniability cross-examination. Regardless of your opinion of FCPA, it is does limit freedom of maneuver by US firms, advances US extraterritoriality, and makes it easy for states such as China gain a commanding position in state to state agreements on the continent. By contrast, French extralegal efforts in the energy sector were easier to deal with as they could be threatened with exposure if they did not limit certain activities.

Reflecting on my operations on many continents, I again submit that FCPA II and its tightened rules on plausible deniability puts a tier of managers, and likely their companies, in a Catch-22, i.e., if you are truly competent at your craft in the region, you will know things that violate FCPA II.

I also believe that the US government can, and has, regularly put commercial firms in the breach between US diplomatic intent and FCPA and export guidelines. Citing private notes from 2004, I submit my commercial experience in the Republic of South Africa (RSA) as an example of skimming the rim of plausible deniability in FCPA I and other statutes:

On my [first] commercial visit to RSA, I was to make a presentation to CSIRO [Commonwealth Scientific and Industrial Research Organisation] in Johannesburg, [with] some 600 in attendance. My [demonstration choice] was a kinematic model of an M-60 machine gun [that I had built to show 3-D interference checking as the round was stripped and chambered - not an easy thing to do with the wire frame models of the day]. I had memorized enough Afrikaans to open the presentation and then shifted to English. My distributor said that the hall [fell] silent... No one instructed me to take military examples. It was just my reading of the reality on the ground...

As CoCom (Coordinating Committee for Multilateral Export Controls) was then governing export licenses to COMECON states, the PRC and other states considered suspect for embargoed use or diversion, I became aware of what I described as a special tilt towards certain governments based upon the degree of difficulty or permissiveness in securing an export license.

I came to see a very favorable tilt towards Pretoria that was at odds with then current state department pronouncements which in hindsight could have been at odds with FCPA:

I [believe that I] was party to a special tacit arrangement to RSA in the late 70s and early 80s [during] which my firm received a blanket $7 million export license to Pretoria for all our CAD/CAM systems. Export seven million and reapply for another seven. [At the same time] COCOM was raking me over the coals on a case by case basis to export technology that was then five year old to the PRC and Czechoslovakia. The RSA economy could not justify sole commercial use of our size of CAD systems [then 75K USD per station]. Every thing we sold was dual use. I took down [unclass] demo models based on proof of function for China Lake [Weapons Test Center], Draper Labs, as well as for the French Superphénix (SPX) reactor series. [In the case of the Superphénix demo, I later learned that I had] sold the CAD systems that went into Valindaba [enrichment] and Pelindaba [weapons design and production] along with enough spares to build a third... Almost every prospect meeting had me presenting to folks who asked questions but never identified themselves. I never took down a commercial example. Things got looser over time as I surmised that my distributor was advising clients that I was not a hostile.

A valid end-use certificate came up from Joberg for every system, and while we did not visit RSA client installations save, if memory serves, for a small manufacturer of excavating equipment, one had to ponder ultimate use. We later learned that this small excavator manufacturer which had purchased a one-terminal system to design tungsten carbide cutters for excavators also designed and fabricated tungsten carbide cores for armor piercing rounds. As noted, everything seemed to be dual use, a functional capacity mandated, as it turned out, by Pretoria as part of its policy of autarky. I would not liked to have been under FCPA II for those efforts. I think it all too easy for an enterprising attorney to build a case of breaching plausible denial.

As an aside, in defense of export license sales to contested states such as the PRC and Eastern Europe (Bulgaria was a major site of advanced design and manufacturing for the USSR):

I even testified at the Pentagon to a foreign technology diversion group telling them how the Soviets, Czechs, and even the Chinese were already making LSI scale chips by stitching together designs produced by a UK system supposedly limited to PCB (Printed Circuit Board) design density. [The process was utter simplicity: the chip design was sectored such that each segment would fit the PCB system, and each sector had defined I/O points to adjacent sectors. Giving up some silicon was an easy trade for otherwise unattainable low volume military production.] They were astonished. Another sign of the fallacy of looking for a mirror-image enemy with mirror-image technology/weapons/tactics. [My testimony] may have made them smarter but it did not ease my export licenses. If memory serves, this was when Richard Perle was in his heyday at export [control].

China's Crackdown on Corruption Still Largely Secret
By Edward Cody
Washington Post
December 31, 2006

Charges of Bribery in a Chinese Bank Deal
New York Times
November 29, 2006

Rare Look At China's Burdened Banks
New York Times
November 15, 2006

The Cost of "Free Trade" in China: Corruption and the FCPA
Posted by Richard at 4:07 PM
Asia Business Intelligence
November 8, 2006

China's bank corruption doesn't faze investors
The multi-million-dollar scandals are a footnote in the floats, write Tom Mitchell and Justine Lau
Tom Mitchell and Justine Lau
The Australian-FT Business
June 05, 2006

Basics of the Foreign Corrupt Practices Act
What Every General Counsel, Transactional Lawyer and White Collar Criminal Lawyer Should Know
By: Robert W. Tarun
Latham & Watkins
April 2006 Edition

FEBRUARY 25 , 2005
Note: Mr. Wray frequently speaks from notes and may depart from the speech as prepared.

Opinion Procedure Release No .: 04-03
Foreign Corrupt Practices Act Review
June 14, 2004

Anti-Bribery Provisions of The Foreign Corrupt Practices Act
[Redline comparison of FCPA to the final version of  S. 2375]
§ 78dd-1. Prohibited foreign trade practices by issuers
1998 Amendments

Foreign Corrupt Practices Act (FCPA)
Department of Justice, Criminal Division

Gordon Housworth

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Presumably used by a Russian, possibly state, faction, Polonium-210 will fire the jihadists' imagination for dirty bombs


An unmentioned subtext in identifying the presumably Russian actor - possibly state, private or an alliance of two or more groups - and the means of delivering a fatal dose of polonium-210 to now "British citizen and former Russian Federal Security Service (FSB) agent Aleksandr Litvinenko," is the attention paid by jihadists to the uproar and disruption it generated as well as the sources of acquiring polonium and other radioactive isotopes.

Most observers, likely including the ordinary jihadist, thought that Polonium was out of reach, severely controlled as is plutonium. The casual observer now knows that:

Contrary to early news reports, polonium-210 -- the poison suspected in the death of an ex-Russian spy in England -- is not some exotic material available solely from nuclear labs. The isotope is available from firms that sell it for lawful and legitimate uses in industry, such as removing static electricity from machinery and photographic film...


Today, polonium 210 can show up in everything from atom bombs, to antistatic brushes to cigarette smoke, though in the last case only minute quantities are involved. Iran made relatively large amounts of polonium 210 in what some experts call a secret effort to develop nuclear arms, and North Korea probably used it to trigger its recent nuclear blast.

Commercially, Web sites and companies sell many products based on polonium 210, with labels warning of health dangers. By some estimates, a lethal dose might cost as little as $22.50, plus tax. "Radiation from polonium is dangerous if the solid material is ingested or inhaled," warns the label of an antistatic brush. "Keep away from children."

Observers now know that it is highly toxic and has no antidote:

Polonium-210 is "approximately 100,000 million (100 billion) times more toxic than cyanide"... Polonium is an "alpha emitter," which, when it decays, emits high-speed volleys of subatomic alpha particles -- each one made up of two protons and two neutrons bound together -- that rip apart DNA coils and bust up the cells in which they reside... causes a hideous death...

The Health Physics Society [which] distributes information on radiation safety, estimates that a lethal dose of polonium 210 is 3,000 microcuries... Other experts put the figure slightly higher.

Observers further know that unless it is being specifically sought, it is not detected by the myriad of radiation detectors at airports, ports and key transit points since it is an alpha-emitter, not a gamma emitter as are traditional nuclear fuels for fissile packages, uranium and plutonium. Until polonium-210 was identified as the cause of death and not thallium (from rat poison) as first believed, and then sought with alpha detectors, it was not known that trace elements of polonium were scattered across London and on at least three BA aircraft on the London-Moscow run.

Observers now know that the UK is unprepared for a radiological event and that public concern will jam communication and response channels in the case of a primary radiological event. We know from the TOPOFF exercises here in the US that first responders will be overwhelmed, decreasing available support to other patients, as citizens demand to be tested, while others will create traffic problems as they attempt to leave the area. See:

The surreptitious radiation poisoning of one man overwhelmed the system's ability to respond:

"The man was radioactive in a hospital for weeks and nobody knew it. That's terrifying,"... "It's taken us three to four weeks to literally get on the case. In terms of us being prepared for a radiological incident, this is a very bad portent."... we can't handle one radiation incident, let alone someone exploding a dirty bomb."

Security officials have been braced for years for the scenario of a dirty bomb -- a device containing a mix of explosives and radioactive material -- that might only kill a few people but would contaminate a wide area and spread panic.

But the detection challenge would be much greater [in] the event of a more insidious attack such as spreading radioactive material in a public place where many people would be exposed and only gradually fall ill. "What we should be focusing on is our ability to detect and react to events like this in the future"

Observers also know that while the principle producer is Russia (certainly the low cost producer) which "sells 8g of polonium-210 each month to American companies for "scientific purposes"" as well as other states, polonium-210 is reasonably available from scientific houses and can be (laboriously) extracted from common industrial items. The fact that extraction is hazardous will not deflect the determined jihadist as we have already seen jihadist proposals to form sacrificial teams in order to produce a crude fissile package.

It would be interesting to audit Russian production, i.e., if Russia sells enough polonium-210 to the US for "thousands of lethal doses" (96 grams is 3.4 ounces), who else procures it. (While Iran produces it, as likely does the DPRK, their primary use would be nuclear triggers.) Many of those states will have legal and illegal channels of varying oversight.

Even if a large amount of polonium-210 is not included in a simple radiation device, it will satisfy the basic requirements of all dirty bombs - disruption and chaos. Jihadists may also look at fellow traveler isotopes and create a cocktail. Purity is not required.

WebElements Periodic Table

Patrick Moore
Vol. 10, No. 224, Part I, 6 December 2006

Patrick Moore
Vol. 10, No. 222, Part I, 4 December 2006

Polonium, $22.50 Plus Tax
New York Times
December 3, 2006

Spy case raises questions on UK radiation response
By Mark Trevelyan, Security Correspondent
Dec 1, 2006 10:09am ET

Polonium-210? it's yours for $69, no questions asked
Tony Halpin
The Times
November 30, 2006

Patrick Moore
Volume 10 Number 214, Part I, November 20, 2006

IRAN Report
RFE/RL Report
6 September 2004, Volume 7, Number 30

Gordon Housworth

Risk Containment and Pricing Public  Terrorism Public  Weapons & Technology Public  


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James Dobbins on correcting US missteps in vision and implementation in the Middle East


Following are my notes taken from James Dobbins speech at the New America Foundation’s panel discussion on Moral Clarity & the Middle East: Long War, Wider War, or the Return to a Peace Process?, 24 August, 2006. Dobbins served as US special envoy for Somalia, Haiti, Bosnia, Kosovo, and Afghanistan. and now directs RAND's International Security and Defense Policy Center.

In the wake of Sept 11, 2001, he was designated as the Bush Administration's representative to the Afghan opposition. He helped organize and then represented the United States at the Bonn Conference where a new Afghan government was formed. On Dec. 16, 2001, he raised the flag over the newly reopened US Embassy. Earlier in his State Department career Dobbins served twice as Deputy Assistant Secretary of State for Europe, as Deputy Chief of Mission in Germany, and as Acting Assistant Secretary for Europe.

This is NOT A TRANSCRIPTION per se but I submit that it substantially presents Dobbins’ encapsulation of his themes (which are well known - see citations at end) regarding the failure of vision and implementation by the Bush43 administration in Iraq in particular and the Middle East in general. This content will be cited in subsequent notes that call for a reassessment of US and Israeli actions in engaging frontline states in both the Levant and Iraq.

Introduced by Steve Clemons, American Strategy Program/New America Foundation. Clemons cites Dobbins’s IHT article, Moral clarity in the Mideast, that ‘brought clarity and sensibility to a muddled issue’ and that he welcomed Dobbins’ comments that were ‘free from constraints that bar clear and open discussion.’ Clemons also cited Daniel Levy’s article in the Forward, Quit the Canard That American Policy Advances Israeli Security, and Flynt Leverett’s article in American Prospect, Illusion and Reality. Those items will be also addressed in subsequent notes.

James Dobbins: In the aftermath of 9/11, Bush43 said you’re either with us or against us, and that made sense at the time as many were with us in a broad coalition not unlike that in 1989 against Iraq for the liberation of Kuwait. US diplomacy abroad had been generally successful and welcomed through the 1990s such that Bush41 and Clinton were more popular abroad than in the US. At 9/11 us leadership was welcomed yet five years later the US is probably at a nadir, probably more isolated that at any time in its history. Iraq, in part, has spent 60 years of accumulated US goodwill.

What went wrong? The easy answer is Iraq, but the problems commenced much earlier. I will divide those five years into three chapters: Afghanistan, Iraq and Lebanon:

Chapter 1: Afghanistan

Victory was not unique as almost all conventional wars conclude successfully and quickly. What was unique was the smoothness of the post-conflict period that owed its success to a broad based effort based derived from broad international support, modest objectives, and the support of all of Afghanistan’s neighbors.

It is a mistake to believe that the US formed a coalition to insure that Afghanistan was stable and was not a source of international terrorism; post 9/11, the US joined an existing coalition of India, Russia, Iran and the Northern Alliance against the Taliban. The US was not the leader in many of the goals that rose from the Bonn Conference; it was Iran that included democracy in governance (my brief did not include that) and cooperation against international terrorism.

The US, Iran, Russia and Germany worked over the Northern Alliance to secure the Bonn Declaration. Iran was a very cooperative member throughout the period. The Northern Alliance wanted 18 of 24 ministries which was insufficiently representative. It was the US, Iranian, Russian and German delegations that bent the NA to accept 16 of 24. Iran had the most senior delegation to Karzai’s inauguration. At the Tokyo donor’s conference, Iran pledged (and proceeded to deliver) $500 Million dollars, by far the largest donation of non-OECD members. Iran offered Dobbins a proposal to rebuild Afghan forces under US leadership, to house, pay, clothe and arm a 20K man force. Dobbins relayed the idea to Washington but it was never taken up by Washington.

Chapter 2: the Axis of Evil speech

The Axis of Evil speech linked together two declared enemies (Iran and Iraq) as cooperating states. That all three states were evil was defensible but that an axis of evil existed was indefensible.

A month later came the National Intelligence Estimate that enshrined two doctrines: never permit the emergence of a peer competitor and preemption. While both are intellectually defensive, they were unnecessarily provocative. Making it a central element of policy was only designed to piss everyone off.

Iraq was "one unanticipated challenge after another"

You could be forgiven for believing that we’d never done any nation building before Iraq, yet it was "one unanticipated challenge after another." You’d think that it was the first time that we had made an effort to liberate then reconstruct, even though there had been seven previous efforts, six of which were in Muslim states (Haiti was the non-Muslim state).

"Calculated indifference"

There was a "calculated indifference" on the part of the US that excluded a body of knowledge that would have helped. Germany and Japan were politically safe models as they had unambiguous outcomes (as opposed to the ambiguous outcomes of Bosnia and Kosovo) and had nothing to do with Clinton. It was politically unacceptable to say that, ‘we’re going to do Clinton but a little bit better.’

The explicit use of "occupation" in a model based on Germany and Japan was an error as the only "occupation" familiar to Muslims in the Middle East was Israel’s occupation of the West Bank and Gaza.

Another issue was the midstream taking away of all aspects of non-military nation building from other units that had handled it for 50 years with varying degrees of success and giving them to DoD which had not done them since 1952. It is a surprise that this exercise in "heroic amateurism" did not fail worse than it did.

Chapter 3: The Second Inaugural Address

The Second Inaugural Address flagged a shift to transformational diplomacy (peacemaking was out) and democratization (which was by then the only rationale left for war). We suffered a growing enemies list. Al Qaeda became Islamic fascists; the GWOT became the Long War and now the Wide War.

US diplomacy isolated the US, not the terrorists, as it:

  • Employed highly polarizing rhetoric and martial terminology
  • Treated Mideast diplomacy as a zero-sum game, a practice which demanded that the US lose every time if we forced locals to choose between the US/Israel and Hamas/Hezbollah/Syria/Iran
  • Used excessive democratization speech, whereas locals wanted other things more than democracy; locals saw their religion and their nationalism, their sectarian culture as higher priorities than democracy
  • Gave democracy a bad name by associating with it with dodgy enterprises such as Iraq

The US positioned itself on the wrong side of issues that locals cared most about, issues that primarily involved:

  • Muslims and non-Muslims
  • Occupiers and non-occupiers

Most of the terrorists are in states that we don’t intend to invade: Pakistan, UK, Germany and Saudi Arabia. As it is not a war in those terms we need to replace inexact terminology:

  • Find new narrative with more precise terminology and analysis
  • Greater discretion in choosing our enemies
  • Craft message for both an internal and external constituency
  • Return to traditional diplomacy as opposed to transformational diplomacy

The central front of the GWOT is Pakistan, not Iraq. As this front is not bombable, we should stop thinking of it as a war. We don’t need to invade Pakistan but rather invest hundreds of millions of dollars in their educational system.

Muslim groups are mostly indigenous, mostly nationalistic. Al Qaeda is a parasite on these groups which couldn’t care less about a new Caliphate. In Afghanistan, Bosnia and Kosovo (notably the KLA), the US supported the proper group regardless of ideology. As a result, al Qaeda was marginalized in Bosnia and Kosovo. We need to choose our enemies and friends based on you national aims, instead of letting al Qaeda chose them by which ever side they’ve joined

Stabilization and security must precede democratization, and that requires dealing with one’s enemies. In Bosnia and Kosovo, we had to engage those who were most responsible for genocide, Milosevic and Tuchman, giving them a seat at the negotiating table, so that we could move towards stabilization. Iraq cannot be held together unless its neighbors cooperate no more than could Bosnia or Afghanistan. In Afghanistan, the US helped broker an agreement between the four states, Russia, India, Iran and Pakistan, that had been tearing Afghanistan apart for twenty years.

We need to talk less about war and more about peace, talk to both our enemies and our friends, show more nuance and less certainty, more sophistication and less simplicity, and more co-option than coercion.

Part 2: Charting Israel's disengagement from the US: Daniel Levy’s commentary on Dobbins

U.S. Policy Toward the Middle East
New America Foundation, American Strategy Program
Washington, District of Columbia (United States)
ID: 193995 - 08/24/2006 - 1:31 - $29.95

Quit the Canard That American Policy Advances Israeli Security
Daniel Levy
The Forward
August 25, 2006
Mirror at NAF

Illusion and Reality
The violence in the Middle East shows the negative consequences of the administration’s contempt for engagement. But the tough talk has failed.
By Flynt Leverett
The American Prospect, Volume 17, Issue 9
Issue Date: 09.12.06

Moral Quagmire
By Stirling Newberry
TPM Café/Coffee House
Aug 19, 2006 -- 11:52:18 AM EST

Moral clarity in the Mideast
James Dobbins
International Herald Tribune
Published: August 13, 2006

In the Wake of War: Improving U.S. Post-Conflict Capabilities
Chairs: Samuel R. Berger, Brent Scowcroft
Directors: William L. Nash, General John W. Vessey, Mona K. Sutphen
Council on Foreign Relations Press
ISBN 0-87609-346-2
September 2005

What to Do in Iraq: A Roundtable
Larry Diamond, James Dobbins, Chaim Kaufmann, Leslie H. Gelb, and Stephen Biddle
Foreign Affairs
July/August 2006

Unfinished Country
Anchor Interview Transcript
Bill Moyers' interview of James Dobbins on Haiti
Wide Angle
August 23, 2005

The US and UN Ways of Nation-Building
By James Dobbins
UNA-USA Policy Brief, No. 8
1 June 2005
(UNA-USA - United Nations Association of the United States of America)

The U.S. and U.N. Roles in Nation-Building: A Comparative Analysis
Brookings Briefing
Moderator: James B. Steinberg; Panelists: James Dobbins, Francis Fukuyama, Major General Bill Nash (Ret.), Susan E. Rice
The Brookings Institution
February 18, 2005

Nation-Building: Germany, Japan, Bosnia, Kosovo
Lessons Learned
An excerpt from "America's Role in Nation-Building: From Germany to Iraq" by James Dobbins, John G. McGinn, Keith Crane, Seth G. Jones, Rollie Lal, Andrew Rathmell, Rachel Swanger, and Anga Timilsina
Feb 2005

Iraq: Winning the Unwinnable War
James Dobbins
Foreign Affairs
January/February 2005

Iraq: The Logic of Disengagement
Edward N. Luttwak
Foreign Affairs
January/February 2005

Iraq: One Year After
Thomas R. Pickering, James R. Schlesinger, James Dobbins
Council on Foreign Relations
March 9, 2004

Nation-Building 101
An Interview with James Dobbins
Wen Stephenson
Sept. 26, 2003

America's Role in Nation-Building: From Germany to Iraq, by James Dobbins
Reviewed by Douglas Porch
Strategic Insights, Volume III, Issue 2 (February 2004)
Center for Contemporary Conflict, Naval Postgraduate School, Monterey

America's Role in Nation-Building: From Germany to Iraq, by James Dobbins, et al. Santa Monica, California: Rand, 2003. ISBN: 0-8330-3460-X. Pp. xxix, 244.

NATION-BUILDING: The Inescapable Responsibility of the World's Only Superpower
By James Dobbins
RAND Review
Summer 2003

America's Role in Nation-Building: From Germany to Iraq
By: James Dobbins, John G. McGinn, Keith Crane, Seth G. Jones, Rollie Lal, Andrew Rathmell, Rachel M. Swanger, Anga Timilsina
ISBN: 0-8330-3460-X
July 2003

Gordon Housworth

InfoT Public  Risk Containment and Pricing Public  Strategic Risk Public  Terrorism Public  


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The second industrialization model - powered by IP harvesting


"Piracy" has become a very imprecise term in describing the risks and impacts to Intellectual Property (IP) in what we call the second industrialization model. We track a four tiered model of IP violation that is marking the progression of newly industrializing states:

  1. Simple piracy (copy with no effort to hide piracy - the audio/video model that applies to anything replicable from CD and DVD)
  2. "Badged" substitute (pirated or stolen Intellectual Property used to create a product masquerading as a legitimate offering by a legitimate supplier)
  3. Substitute product (pirated or stolen Intellectual Property used to create a "no name" or "new name" product competing with a legitimate offering, usually on price)
  4. Supplier substitution (original legitimate supplier is forced from the market, replaced by the copier)

While all four are IP theft, we have bowed to convention in the popular press to describe the first as piracy while reserving the other three as IP theft, especially as the theft is masked such that the sellers have distanced themselves from the theft.

As a heretofore internal working term, we call this the second industrialization model, the first being textile manufacturing. Although the French perfected large textile looms, their output was craftwork for a limited clientele. It was left to the English to turn looming into a mass production affair. The US purchased old, discarded looms, copying them down to their eccentrically worn bobbins to commence the colonial industrialization. Nation after nation subsequently followed suit for well over one hundred and fifty years.

We see the codification of a new industrial model in the postwar period based upon "commercial on commercial" Intellectual Property (IP) attack. While the earlier "military on military" or state on state espionage remains vibrant, a significant focus has shifted to advancing dual use technologies which bring both military advantage and domestic commercial industrialization.

Within this model, nations in a position of strength, specifically in innovation - part of which is acquired without royally, normally do not want IP protection laws as they are either independently innovating, thereby able to sell at a premium; producing more efficiently, thereby driving down costs over competitors; or imbedding surreptitiously acquired IP and thereby terminating the revenue streams of competitors. Nations tend to seek or support IP protection laws when they are in decline by some combination of an ebbing of innovation, emergence of lower cost producers, or new producers harvesting their IP and ending expected revenue streams.

The postwar Japanese model tracked this progression and is only now promoting IP protection laws in the face of Korean and Chinese successes in former Japanese core industries. The Chinese are expected to accelerate the model significantly. The downside for firms and industries affected is that China (and I started my commercial visits in 1980) is unique among developing nations in having a "first world" mentality even as it had a "third world" industrial capacity, i.e., from its "reopening" in the 1970s, it closed off industrial penetration and investment that it did not like (which most other industrializing nations could not or would not do) as it turned a benign eye on virtually any domestic industrial effort that nurtured growth, revenue and industrialization. How it achieved the IP required to do that was never questioned.

As is widely known among skilled China watchers, edicts on IP infractions, or anything else, often rarely leave Beijing as provincial, city and enterprise zone mangers do largely as they wish and are tolerated so long as they bring growth and revenue without significant embarrassment to the Party (CCP).

Firms that do not understand this landscape and industrial progression are ripe for IP harvesting. Moreover, legal remedies are largely ineffectual and the rewards moot as the IP is already lost and all expected downstream revenue is attenuated. Readers may wish to examine Low cost is not low risk: realities of IP Loss for realities on the ground.

Next step in pirating: Faking a company
By David Lague
International Herald Tribune
APRIL 28, 2006

FBI Sees Big Threat from Chinese Spies; Businesses Wonder
Bureau adds manpower, builds technology-theft cases
Jay Solomon
Wall Street Journal
12 August 2005

New York Times
January 9, 2005
Fee archive
Html miror
PDF mirror

"The China Price"
DECEMBER 6, 2004

Why China Is Making The Valley Fret
U.S. chipmakers worry that a new Wi-Fi standard puts their businesses at risk
By Cliff Edwards, in San Mateo, Calif., with Jim Kerstetter in San Francisco, Bruce Einhorn in Hong Kong, and Paul Magnusson in Washington
Business Week
MARCH 29, 2004

Car-Parts Piracy Has Auto Makers Spinning Their Wheels
February 26, 2004

The grille looks familiar …
Western automakers are torn between the lure of the world's fast-growing market and the dismay of seeing their intellectual property 'borrowed' by the Chinese
By Tim Querengesser
The Ottawa Citizen
May 07, 2004
May have scrolled off
Mirror minus the images

Intellectual Property Rights in China: Face it or Face off
China High Tech PR ( monthly newsletter
The Hoffman Agency
December, 2003

Nissan ponders piracy suit vs China's Great Wall
Nov 28, 2003

Master of Innovation?
China aims to close its technology gap with Korea and Japan
By Bruce Einhorn in Shenzhen
Business Week
APRIL 14, 2003

When Spies Look Out For the Almighty Buck
New York Times
October 22, 1995

Gordon Housworth

InfoT Public  Intellectual Property Theft Public  Risk Containment and Pricing Public  


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Systematic 'terrorism tax' to be levied against Indian BPO and data outsourcing assets


[India has] become a magnet for terrorists both within its borders and all across Asia, and these terrorists have easy access to state money and resources (unlike, say, "entrepreneur" terrorists in Iraq)... [Pakistani] state (ISI) and non-state interests within Pakistan are interested in destabilizing India in any way possible. Meanwhile, in India's Kashmir province, local militants have been waging a war against the state for decades. India's population of 200 million Muslims and many millions of Sikhs provides a large, ineradicable, and discontent population base for terrorists… India is [a] target for pro-Chinese interests in the region [now that New Delhi has formed an informal defense alliance with the US]…

In Indian Pipedreams, January 2006, we said, Political attacks have turned economic in India. The Mumbai bombing will be the first of many more. After the initial obligatory apologist comments in the wake of the 2006 Mumbai attack that nothing was amiss (which mirrored those after the 2005 Bangalore attack), offshore outsourcers wanted to know about their Indian vendors' disaster recovery and business continuity planning, their state of operational readiness and just possibly how those plans meshed with those of the clients. Many such questions will be raised with increasing frequency in India.

John Robb has rightfully made a cottage industry out of the heretofore too often overlooked concept of systems disruption in which "a nation-state's economic and societal infrastructure" becomes a far more attractive and achievable target that its "conventional armies":

[Our] large urbanized population centers are reliant on a complex set of relatively automated infrastructures. The operational objective of the global guerrilla warfare will be to separate a large urban population from its infrastructure and take advantage of the collapse and chaos that results.

It is essential to understand that outsourcing infrastructures mirror the advantages and risks of virtually all commercial systems and their supporting IT systems:

Vulnerability of commercial supply chains:

  • Designed for economic & production efficiency
  • Not designed for security
  • Backward re-integration of security can be disruptive and costly, invariably leaves exploitable holes

Commercial versus terrorist supply chains:

  • Commercial: Economic efficiency & Production efficiency
  • Terrorist: Attack success at acceptable risk - where "acceptable" risk can be the attackers' death
  • Different goals, different way of thinking - defenders have no asymmetrical mindset, guard the wrong things, lull themselves into a false sense of security

Substitute IT streams to/from Indian BPO services and data facilities serving finance, banking and operations for the gas flowing through Gazprom pipelines in Georgia and outsourcing will soon experience the same kind of outages which Robb described as:

  • Even entire nations are vulnerable to systems disruption.
  • Systems attacks can provide amazing leverage. An afternoon's work knocked out a country for more than five days.
  • It can be repeated again and again. The attack was simple, the vulnerability is vast, and the attackers weren't caught (nor are they likely to be).

I might add that multiple attacks can be stacked in a manner that attacks different parts of, and locations within, the system. Net net, the system could be substantially or frequently down without executing the same attack twice.

Speaking like true defenders, an otherwise very thoughtful finance colleague's comment that "The Arabs can't drink the oil" matches Putin's comment that "Killing the [fuel and energy sector golden] goose would be insane, stupid and unacceptable." Some Arabs would be happy to keep the oil in the ground or interdict its transfer and there doesn't have to be many of them to interrupt supply. The same applies to Indian outsourcing; sad to say that acknowledged outsourcing advisors like Forrester and Gartner appear immune to terrorist and Intellectual Property (IP) threats. See:

Both Robb and ourselves were impressed by Demir Barlas' The Indian Supply Chain that applied Harrigan and Martin's terrorism tax to the Indian condition. Add our "twofer" concept (direct damage to the Indian state and its ability for economic gain, and indirect damage to US and European firms, succeeding in India where an attack on US/EU soil would be prohibitive in terms of placing surveillance and strike teams on the ground) to Barlas' analysis and the conditions are ripe for US/EU outsourcers to revalidate their risk appetite, reconsider their outsourcing strategy, and institute realistic and appropriate protection measures.

In assessing the viability of cities "in the face of catastrophes such as terrorist attacks," Harrigan and Martin analyzed why cities form and prosper, concluding that "the same forces thought to lead to the formation of cities - namely, the economic gains derived from the proximity of firms to markets, suppliers, and a large labor pool - help to preserve cities at risk of terrorism and other catastrophic events." Whereas a "onetime terrorist attack on a major city [that] does not increase the ongoing costs of doing business in the city [will have] no long-run economic effect," a terror tax rises from a continuing threat that "imposes ongoing costs" [that] exceeds a critical level [so as to] disrupt a city’s agglomeration forces."

The terror tax "reflects the costs associated with such hardships as fear, higher insurance rates, and security-related delaysdetracts from firm profits or worker income without funding improvements in infrastructure or services, as a typical tax might." Workers are driven away in the absence of a wage premium that the city can no longer pay. Harrigan and Martin state that the "future viability of urban life would be threatened only if all of several conditions existed":

  • firms were unable to obtain any private insurance,
  • the nation offered no financial assistance in the event of an attack,
  • an incident of the destructiveness of September 11 was expected to occur every year, and
  • the balance of forces that sustains agglomeration is even more fragile than the model simulations suggest.
  • India's cities no not need to dissolve but only attrite in the face of rising costs

While these assumptions may be necessary and sufficient to collapse a city, an asymmetrical attacker need only incrementally degrade India's cost, availability and response advantages. Back to Barlas:

India's entire IT/BPO industry, which is worth tens of billions of dollars, is motivated by the relative cheapness of doing business in India. When terrorism disrupts this dynamic and forces India to raise prices, internally and externally, margins will be sacrificed and some business will go elsewhere…

The argument can be made that India's role in the information industries is exempt from disruption. After all, while the delivery of energy is something that can easily be physically sabotaged, disrupting the delivery of services is more complicated (there isn't a single node through which most or even many Indian BPO workers travel, for instance).

However, this disruption can be achieved indirectly through the levying of a terrorism tax that will raise the cost of doing business in India to an unacceptable level for Western companies. With margins shrinking all over the globe, a terrorism tax of 10 percent may be sufficient to drive a large amount of business elsewhere. Terrorists don't have to topple the Indian economy; they only have to shrink it.

To some extent, we have already seen how the Indian IT/BPO machine is vulnerable to system disruption. The HSBC fraud case, for example, impacted only a handful of customers directly, but has reached millions of people via the media, and may be responsible for some high-profile pullbacks from India.

Along those lines, terrorist attacks that degrade India's service delivery capacity even marginally will cascade across the entire Indian supply chain. The Mumbai attacks demonstrate that local guerrillas have begun adopting the "best practices" of the global marketplace of terrorism, and there is no reason to think that they will stop.

If Barlas excites you 'as is', your concern will rise when you understand the quantum leap in skills and organization involved in the Mumbai bombing and the pressure on an unprepared, understaffed local Hindu police force attempting to operate against large, poor Muslim neighborhoods:

  • The attack: "[T]error attacks as sophisticated as the train bombings were unprecedented in India… "It was a brilliant piece of precise, military organization, which required the involvement of six or seven different terrorist cells, able to coordinate attacks within minutes of each other. I think this indicates a group connected with Al Qaeda, probably Lashkar-e-Toiba... We have never seen anything like this in India before."... "This was an attack on India’s economy, designed to dissipate foreign investment. It was also an attack on the country’s middle classes.""
    • Combination of RDX, ammonium nitrate, and fuel oil
    • RDX most likely used as a booster charge for blasting agent
    • Devices contained nails and iron filings
    • Explosives placed on elevated mesh luggage racks
    • Detonated as trains were on or at railway stations
    • Small delayed ignition devices found at 3 blast sites
  • Local police response: "The bombers could not have gone after a more unprepared, overcrowded, inept target. The police in India are pathetic. Their resources scarce. Their capability to counter and foil plots like these is almost non-existent… The rate of change from utterly useless to somewhat meaningful presence in the police force in Bombay has been staggering. As if overnight, the police and other domestic security forces in India have started to cooperate, burning the midnight oil, getting things done."
  • Looking forward:
    • Mumbai has Muslim community of 6 million
    • Large portion unemployed males, 18-30 years old
    • Valuable economic center
    • History of attacks
    • Mumbai attractive, symbolic target

Firms outsourcing to India need to rethink supply chains from a terrorist viewpoint:

  • Current systems can be abused without alerting their managers and key upstream and downstream stakeholders
  • Current systems create false negatives & positives
  • Capture risk management objectives that balance commercial and security objectives
  • Develop measurable and testable process to provide evaluation of threats over time and decision support options

Mumbai Railway Blasts (Updated July 18)
Blair Johannessen, South/Central Asia Regional Coordinator
Overseas Security Advisory Council (OSAC)
13 Jul 2006 (Updated July 18)
PPT Attachment

The Indian Supply Chain
A global network is only as strong as it weakest link; the implications of relying on Indian nodes in an age of economic terrorism
by Demir Barlas
July 14, 2006

Indian Intelligence Takes Closer Look at Al Qaeda
New York Times
July 13, 2006

Train Bombers Focused on Mumbai Business Class
New York Times
July 13, 2006


Mumbai Bombings Shake Outsourcing Community
By Stan Gibson
July 13, 2006

Bombay Bombing and Antibodies
posted by Federalist X at 9:41 PM
Amendment Nine
July 13, 2006

Mumbai blasts should not affect investment to India
Investors said to have already factored in risks
By John Ribeiro
IDG News Service
July 12, 2006

Mumbai Inquiry Focuses on Militants
New York Times
July 12, 2006

Posted by John Robb
Global Guerrillas
January 26, 2006 at 07:22 PM

Posted by John Robb
Global Guerrillas

Terrorism and the Resilience of Cities
James Harrigan and Philippe Martin
Federal Reserve Bank of New York
FRBNY Economic Policy Review / November 2002

Gordon Housworth

InfoT Public  Risk Containment and Pricing Public  Strategic Risk Public  Terrorism Public  


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Virally infected suicide terrorists: return of a reoccurring theme that finds our defenses lax


A Canadian speaker at the FBI National Academy Associates 2006 ANNUAL TRAINING CONFERENCE posed the question, "Who would think someone will deliberately infect people and send them out to infect others?" as part of a discussion of a "suicide terrorist infected with a deadly virus." It would "be harder to detect than one packing explosives as well as being a significant threat to first responders "including rescuers -- even cops with gas masks and ordinary protection gear." "There has to be some recognition that some people will die."

The especially sad part is that this is not new news. I am reminded how themes, on our side and our adversaries, appear to rise and ebb without continuous attention so as to be repeatedly viewed as new and their employment carrying an undeserved element of surprise.

One such theme is beheading. In 2003, a colleague cited a NYT item, Conflict on Iraq-Syria Border Feeds Rage Against the U.S. "about video disks being distributed in Syrian border villages encouraging attacks on US troops patrolling the border and showing what appeared to be an American - at any rate, a white male - being beheaded, while surrounded by a cheering crowd. The Pentagon denies that any US casualty was beheaded" and asked:

Has anyone ever heard of an incident like this that might be serving as the material for the videodisk - I'm thinking something that might have happened elsewhere at some other time. I've heard of Soviet soldiers being beheaded on film in Afghanistan in the 1980s and the tapes being used to raise funds in the Gulf. Ditto Chechnya, although in that case you didn't have cheering crowds. I'm wondering if someone's adapted some old footage to a new cause.

My private response was:

Yes, prisoners of varying nationalities were sold for sport during the Russian and post-Russian incursion periods -- the closest thing in our lexicon would be a souvenir photo. It was a local affair, a personal memento to take home, rather than an external fund raising event. A video tape was made of the proud owner generally slitting the throat or shooting the purchased prisoner, but the preponderance was the throat. One has to understand the Afghan sense of humor to make any sense of this.

It does not surprise me that copies would make their way elsewhere just as the slit throat and later beheading of a US journalist made its way into radicalist propaganda videos.

We were unduly surprised by the beheading of Daniel Pearl and most recently with the beheadings of Russian diplomats. We are surprised only because we forget. See Jihadists extend kidnapping and implied beheading down the coalition supply chain.

Jihadist as infection transmission vector is not new either. From Rethinking biological warfare at a human scale, January 16, 2006:

The [2005 HIV BOMBERS] report in the Sunday Mirror (UK) regarding the possible recruitment of AIDS infected individuals as suicide bombers is not a new idea as it occurred as early as 2002 in Palestine when rat poison was intentionally placed in suicide vests and by happenstance when postmortems of suicide bombers revealed Hepatitis B infections. The only curiosity is why expansion would take so long and how the process will morph.

Citing UK MOD documents released in the aftermath of the July 2005 London bombings:

Terror chiefs are also targeting fanatics who suffer other lethal blood diseases such as hepatitis and dengue fever in order to increase their "kill rate" from an explosion. "There is evidence that terrorists might be deliberately recruiting volunteers with diseases that are spread by blood transference." Experts have found that bones and other blood-spattered fragments from a suicide bomber could penetrate the skin of a victim 50 metres away and infect them…

All these discussions overlook the potential for a prospective suicide bomber to voluntarily permit infection thereby sidestepping the "search" for a willing infected. I can see the process as an early and easy commitment to martyrdom. Once the presence of AIDS is confirmed, the martyr can proceed to carry out his or her suicide mission. There are other diseases, natural and bioweapon, that can lend themselves to infection and dispersal by "human shrapnel."

In all cases, the psychological aspects of a 'human dirty bomb' are as valuable as the direct blast effects. returning to the Sunday Mirror, consider the distancing that is recommended for UK personnel. If nothing else, the jihadists succeed in driving yet another wedge between the locals and the military:

soldiers are warned to wear special protective clothing when on guard duty or if they have to deal with casualties in the event of an attack. All bases must also have snipers hidden behind blast-proof defences ready to take out would-be suicide bombers...

While I agree [that] it is simply a matter of time before international terrorist groups such as al-Qa'eda acquire weapons of mass destruction and use them in attacks," I submit that the attack can come quickly, cheaply and in mass on a human scale.

As I have been forecasting this attack vector for some time, I've been thinking on the means by which a Judas could infect him or herself to show a group of innocents, say, a group of Mexican migrant workers ready to set off for El Norte, the US, that their 'free' inoculation is safe. The group comes across "clean" as the symptoms have yet to manifest themselves, then they infect others before taking out various first responders as either police pick them up or the unknowingly infected go to medical facilities.

Were I doing it, I would set up a medical clinic as a cover doing legitimate work for a period of time that would lessen the attention of the authorities even as it draws innocents to my facility. At the right time, a very large group is infected on the eve of migration.

While scenario spinning can be dangerous, the various and simplest permutations by which attacker and innocents alike can be infected without notice is useful to study. DHS still looks at far too complex attack scenarios in framing a likely asymmetrical attacker. See Bioterrorism Drill TOPOFF 2 -- Failing to think like al Qaeda & relearning old lessons and Katrina as an "incident of national significance" puts the lie to DHS scenario planning for terrorist event preparation.

Before 11 September, Asymmetric Conflict 2010 noted a Vietnam Redux camp:

has begun to form around the core proposition that it is possible for the aggressor to achieve his principal strategic objectives in the theaterto induce U.S. withdrawal before achievement of its war aimswithout resorting to the high-risk use of nuclear, biological, or chemical threats or attacks. Adherents of this camp generally believe that regional actors are likely to have sufficient conventional power to achieve their ends, even if that conventional power is far inferior to that of the United States, and that the necessary strategic behaviors can be induced of Washington without projecting the war into the American homeland (which they also tend to see as unnecessarily risky). In the words of one analyst, "first principles for defeating a global power [without WMD] are in wide discussion 'out there'." [Statement made as an introductory remark by one of the speakers at a day-long symposium at IDA… The speaker was a senior member of the Intelligence Community, speaking on a not-for-attribution basis. The 11 principles that follow in this text reflect the author’s effort to distill the key strategic points from that discussion.] These principles appear to still be in the formative stage of debate among U.S. experts, but the research performed for this study suggests that they encompass the following:

  1. The weak can defeat the strong.
  2. Take a long time to prepare.
  3. Red can out-innovate Blue.
  4. Strike a fait accompli, reversible only at high cost.
  5. The Information Age empowers Red as much as Blue.
  6. Blue precision-guided munitions can be defeated.
  7. Red counterstrikes cannot be "defeated."
  8. Embarrass America.
  9. Time is not to the U.S. advantage. America fears quagmires.
  10. Escalate in ways that make it hard for the U.S. to counter-escalate.
  11. Don’t surrender. So long as you never lose, you’ve won.

The essence of this approach to asymmetric conflict is that the American public can be made weary of the costs of prolonged war, which will translate into an eventual political willingness to settle the conflict on terms that preserve the aggressor regime and potentially some of its original gains. And it can be made weary through sustained generation of U.S. casualties that will not result in U.S. escalation so long as those casualties do not occur suddenly or dramatically or otherwise generate great fear or anger among the American public. Indeed, recourse to WMD attacks in-theater and to terrorist attacks on the U.S. public could be seen as unnecessarily provocative. As Freedberg has argued, "If an adversary’s greatest asset is American indifference to conflicts in distant lands, then the last thing he wants to do is bring the war home to America.

The eleven points still track in a post 11 September world; Unfortunately, the closing "unnecessarily provocative" comments do not.

The combination of suicide terrorism and a willingness to "bring the war home" is extremely effective. From Iraq replaces Palestine as militant Islam's crie de guerre:

[S]uicide terrorism is a form of weaponry that terrorist groups, secular and religious, operate at a level above the suicide bombers. Suicide attacks are efficient weapons in that they have an effective homing capacity combined with obstacle avoidance and best timing of detonation...

Robert Pape, author of Dying to Win: The Strategic Logic of Suicide Terrorism, [notes that] religion is NOT the important criterion for a suicide volunteer. The principal stimulus to volunteering IS foreign occupation which increases nationalist resistance. (Religion is, however, a multiplier when the foreign occupying power has a religion different from the local community which the terrorists can exploit to their benefit…). Suicide terrorism is a quintessential asymmetrical attack tool in that suicide coercion is the inverse of the military coercion of the larger, ostensibly stronger power. The "presence of foreign combat troops on territory that the terrorists prize" cuts across all other drivers, be it religion, social status, revenge, poverty, or low education. Following the success of Hezbollah and its Iranian handlers in dissuading the US, France and Israel to remain in Lebanon, other asymmetric groups adopted the strategy (although much of the technical advances have been made by the Tamil Tigers in Sri Lanka). Of the terrorist campaigns since 1980 that Pape has studied, 13 have concluded while 5 are still ongoing. Of the 13, 7 resulted in territorial gains for the terrorists while 6 did not. Pape writes:

"The main purpose of suicide terrorism is to use the threat of punishment to compel a target government to change policy and most especially to cause democratic states to withdraw forces from land the terrorists perceive as their national homeland."

Pape states the reality of needing to "find a lasting solution to suicide terrorism that does not compromise our core interest in maintaining access to one of the world’s key oil-producing regions." Dying to Win points to the need for counterterrorist strategies that defeat the current pool of suicide terrorists while deflecting or disarming the forthcoming emergence of a larger pool. Pape paints a steep slope that is not now being pursued, certainly not with sufficient competence, consistency, or funding, combining such actions as thoughtful concessions to occupied areas that rob terrorist groups of their support and possibly their legitimacy among the sea in which they swim, reconciliation with Muslim states and developing core alliances with Iraq and Saudi Arabia to combat of anti-Americanism in the Middle East.

The absence of such reductive policies predicts sustained suicide terrorism without limitation.

Li’l bugs, big peril (Item 4)
CBR Weapons and WMD Terrorism News- July 19, 2006
Center for Nonproliferation Studies of the Monterey Institute of International Studies

Li'l bugs, big peril
'Bio-terror' weapons easier to hide than a bomb, FBI briefing told
July 18, 2006

Video: Islamic Terrorists Behead Russian Diplomats
John LIttle
Blogs of War
June 25th 2006
Note: The video link is no longer active but the stills are

Iraq Insurgents Claim to Kill 4 Russians
Al-Qaida-Linked Group Says It Killed 4 Russian Diplomats in Iraq, Posts Video Showing 3 Slayings
Associated Press/ABC News
Jun 25, 2006

AFTER THE WAR: FRONTIER; Conflict on Iraq-Syria Border Feeds Rage Against the U.S.
New York Times
July 15, 2003
Fee archive
Mirror LFP - Lebanese Foundation for Peace

Asymmetric Conflict 2010
Brad Roberts
Prepared by IDA
November 2000

Gordon Housworth

InfoT Public  Infrastructure Defense Public  Risk Containment and Pricing Public  Terrorism Public  


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Striking Mumbai is akin to striking financial centers such as Manhattan or London yet many in the west are oblivious


Too many in the west don't know that Mumbai is Bombay renamed, much less that it is the financial center of India. In Why are US blogs ignoring Mumbai..., Ennis Singh Mutinywale notes that the Mumbai attack had "similar methods, similar scale" to the "Madrid 3/11 bombings and the London 7/7 bombings" but rates "barely a mention" in the US blogger press:

Doesn't this story have important ramifications for American foreign policy? If the attacks were mounted by a Pakistan based organization, it could move two nuclear countries closer to an armed confrontation. If it was mounted by Al-Qaeda, that would be significant as well...

I can say that it does indeed have critical ramifications which, say to say, are being studiously ignored by the US and EU outsourcing community and the 'stateside' customers of those outsourcers. Those same ramifications are being as quickly minimized away by Indian outsourcing firms concerned that clients will seek safer sites (Indian costs are already rising which is forcing tertiary outsourcing to China.) There is also a cultural overhang to the lack of coverage which, while anguishing to many lay Indians is viewed with some relief by Indian business seeking operational continuity.

We have been covering the actions of the jihadist Lashkar-e-Toiba (LeT) (Army of the Pure),  Naxalite Maoist groups such as the People's War Group (PWG), and the United Liberation Front of Asom (ULFA) for some time. Our predictions are tracking well and it is only the aggressive actions by Indian security services that have minimized attacks to date. See:

We will return to these items but I would like to combine Ennis' more detailed critique at Sepia Mutiny with what I think is the best analysis of media bias in disaster coverage, the Journal of International Affairs monograph, “Regarding the Pain of Others”: Media, Bias and the Coverage of International Disasters.

I cannot recommend this article enough. It illustrates what I call the "lens of the news" that wanders a tiny spotlight through a dark room; events out of the spotlight are immediately forgotten while some never get in:

Over the last two years the world has had a surfeit of disasters. Everywhere one turned there were new photographs of bodies lined up so relatives could come and claim them. In October 2005, the images of covered corpses, stunned faces, keening mothers, tumbled homes and nature gone awry resulted from the South Asia earthquake. In August, the global tragedy was Hurricane Katrina, where the bodies the world saw weren't under rubble but floating in New Orleans' toxic flood. In July, the casualties were British; grainy cell phone photos carried viewers into the very moment that terror struck the London transport system. In December 2004, the sprawled bodies in awkward, disconcerting color were the child and adult victims of the Indian Ocean tsunami. Three months earlier, in September, the translucent corpses of children were from the school siege in Beslan. And virtually every day-should one have troubled to look for them-one could find photographs of the human and other wreckage of another suicide bombing, or three, in Iraq.

But not all of the crises of this past year or so have equally commanded the attention of the world and its cameras. Some disasters have had the bad luck to occur at a moment when a more telegenic disaster was already capturing global attention… Other crisis stories have played even more poorly in the media… And some crises of unimaginable proportions still go unreported; the number of threatened or killed is not a solid predictor of coverage. The media have covered some of the most devastating disasters sporadically… Other global disasters are in such a state of stasis that the media have effectively ignored their numbing devastation…

The analysis of US press coverage is savage and well deserved:

Exactly what the American mainstream media considers to be important could be read in their coverage of the crises of 2005: just-breaking news, dramatic pictures, Americans at risk, situations that can be distilled down to uncomplicated controversy (he said, she said) or uncomplicated violence (such as that caused by natural disasters), quick and/or resolvable denouements and human anecdotes. Immediate actions are valued far more than processes. With this as the key, it is easy to understand why the top news stories in 2005 could range from the devastation of the tsunami to Jennifer Aniston's divorce, from the death of Pope John Paul II to the care and feeding of Terry Schiavo.

Most mainstream media outlets do not consider international crises and disasters holistically. Crises are not crises; instead, they are a kind of virtual merchandise to be sold to fickle audiences who select what news to consume from an exhaustive menu of choices-from tragic disasters to celebrity breakups. When media consider what stories to put on their news budget, elements often far removed from the intrinsic "importance" of a crisis matter.

Like the insurance industry that worries over insured losses more than absolute losses, the media worry over what is "new," what is photogenic, what directly affects their audience, what can be told in a minute-thirty or seven hundred words. The elements of a crisis are disaggregated and evaluated quite dispassionately, often by media accountants with priorities and expectations far different than that of government officials, policy wonks, NGO specialists, insurance executives or even news junkies.

When relief workers look at crises and see crises, for example, media look at crises and see news which is, for most media, a commodity. Other professions-engineers or health workers, for instance-might consider the same crises and see needs of a global community or of individual victims. Viewed in that light it is possible to understand why media institutions do not have any inherent business instincts to cover even major disasters beyond the initial cataclysm.

'Regarding the pain of others' explains much of Ennis's distress and it did that of many Pakistanis over the minimal coverage of their devastating earthquake. The section THERE'S NOTHING BETTER THAN PHOTOS OF A "WHITE WESTERNER IN A BATHING SUIT" goes far in explaining the relatively strong and sustained attention and outpouring over the 2004 tsunami while many other disasters of similar scale were forgotten save for aid agencies, recovery planners and risk analysts as myself.

As I write this, the Israeli incursions against Lebanon and Gaza are pushing Mumbai out of the western news hole. The lens of the news is moving on.

Returning to Indian specifics, we have long identified the multiple benefits of militant attacks against Indian economic recovery. From Commercial blindness:

An LeT attack on outsourcers in India is a "twofer" in that an attack damages the Indian state and its ability for economic gain directly, and damages US and European firms indirectly -- where an attack on US soil would be prohibitive in terms of placing surveillance and strike teams on the ground…

Who can blame the Indians for keeping mum, but where are the US and European firms that should have a fiduciary responsibility to their stakeholders and to their clients who data and business continuity are in the possession of their Indian entities and outsourcing partners?...

[India benefits from the fact] that the great unwashed commercial consumers in the West do not know who Lashkar-e-Toiba, Army of the Pure, really is. The South Asia Terrorism Portal [is] a sound source of basic information, unlike many other Indian sites which are merely anti-Pakistani or nationalistic... SATP has much to say about Lashkar-e-Toiba here ... but I would net it out as follows:

LeT rose as part of the Mujahideen resistance against Soviet occupation in Afghanistan as the military wing of Markaz-ud-Dawa-wal-Irshad (MDI), an Islamic fundamentalist organization rising from Pakistan, where the US has been pressuring Musharraf to curb their activities. LeT’s goals go far beyond regaining Muslim control of Jammu and Kashmir to recreating Islamic governance of India in union with other predominantly Muslim states surrounding Pakistan. LeT is now active in Jammu and Kashmir, India, Chechnya, again in Afghanistan from 2002 to date, Iraq, Bosnia and other garden spots. Think of LeT more as educated and skilled than [as] peasants…

The threat to IT and outsourcing assets in Bangalore and Hyderabad should be taken seriously despite the bland denials from Indian authorities who are understandably anxious to protect what amounts to the core of Indian economic revival… Thoughtful outsourcers there should consider counterthreat and personnel security improvements in addition to IP theft mitigation…

The December 2005 attack against a "temple" of Indian "knowledge society," Bangalore's Indian Institute of Science (IISc) occasioned a forecast extension of the twofer concept. From Indian pipedream:

Shock waves still reverberate through the Indian high-tech community... "the psychological impact of the attack is immenseanalogous to the impact that an attack on MIT would have in the United States."

Political attacks have turned economic in India. Shock waves should be reverberating though US outsourcing assets in the Indian subcontinent, but they remain inert... 

Extending the "twofer" concept in October 2005, we had forecast this attack progression:

  1. Personnel and symbolic targets
  2. Expat data and business process outsourcing (BPO) centers
  3. Manufacturing and development centers

The latter two target groups can cause supply chain disruptions. It is overlooked, for example, that great numbers of US banks have Indian data centers, attacks against which have a multiplier effect in that the bank and all its customers are affected.

Targeting data, BPO and manufacturing facilities leverages the operations and business continuity of US and European firms that would otherwise be difficult to attack directly, while embarrassing the Indian government in demonstrating that it cannot protect its offshoring endeavors, thereby driving potential investors to areas presumed to offer less risk. Unfortunately, relocating from India elsewhere in Asia merely exchanges direct attack risks to more intellectual property loss risks...

The key for expat firms that have no viable options for relocation is to conduct a rigorous vulnerability assessment, then implement the appropriate risk mediation interventions for personnel, facilities and data.

Commercial damage control got underway following the IISc attack as is now happening after the Mumbai attack to placate US and European clients. After IISc:

Nandan Nilekani, CEO of a major Indian outsourcer, Infosys Technologies Limited, was quick to attempt to play down risk to US firms:

"Our campuses are physically secure. We have all kinds of checks that we do. The entire perimeter is guarded which we believe enable us to be fully secure."

The interviewer went on to quote Nilekani as saying, "Even after American companies factor in additional security costs, doing business in India is still far cheaper than staying home."

And after Mumbai:

Sanjay Anandaram, "a partner at JumpStartUp Venture Fund, a US$45 million fund with headquarters in Mauritius":

Investors are not naive and have factored in the political, economic, and other risks involved before investing in India… The blasts Tuesday have not led investors to revaluate doing business in India, because they are among several attacks, riots, and natural calamities to have affected Mumbai and the rest of the country over the years… After similar bombings targeted business centers in Mumbai in 1993, business returned to normal once the story was no longer in the news pages.

A "spokeswoman for ICICI OneSource Ltd., a business process outsourcing company in Mumbai":

Customers outsourcing to India have their own business continuity plans in addition to what Indian outsourcers offer. "On an average less than 10 percent of what is outsourced by a customer is offshored to India, and within India they use providers in multiple locations"… ICICI did not have to move work to its centers outside Mumbai Tuesday, as all its staff for the evening shift were already in the office.

If you believe the spokeswoman, I have some beachfront Arctic property for you. The vast majority of foreign firms are in denial or have been lulled into a false sense of security as the effectiveness of their "business continuity plans." LeT may not be able to operate outside the Indian subcontinent, but it is a skilled and persistent attacker within it. Again, I cannot blame Indian business for wanting to obscure the magnitude of a threat that is growing, in part due to India's success in attracting businesses and industry that can not be easily struck in the US or EU.

If it is confirmed that al Qaeda has an operational cell in the Indian-controlled part of Kashmir, LeT's home territory, Indian authorities will face a heightened threat of Muslim extremism.

Indian Intelligence Takes Closer Look at Al Qaeda
New York Times
July 13, 2006

Train Bombers Focused on Mumbai Business Class
New York Times
July 13, 2006

Open Thread: Mumbai Bomb Blast
posted by Arzan Sam Wadia at 9:26 AM on July 15, 2006
Mumbai Metroblogging

Points that the Mumbai Blasts tell us...
posted by Santhosh G Wilson at 6:48 PM on July 13, 2006
Mumbai Metroblogging

Why are US blogs ignoring Mumbai, ask South Asian bloggers
posted by Xeni Jardin at 04:00:18 PM
July 12, 2006

Deafening silence in the blogosphere
Ennis Singh Mutinywale
Sepai Mutiny
July 12, 2006

Mumbai blasts should not affect investment to India
Investors said to have already factored in risks
By John Ribeiro, IDG News Service
July 12, 2006

Mumbai Inquiry Focuses on Militants
New York Times
July 12, 2006

Series of Bombs Explode on 7 Trains in India, Killing Scores
New York Times
July 12, 2006

Blasts in Mumbai's local trains.
posted by Selma Mirza at 9:46 PM on July 11, 2006
Mumbai Metroblogging

“Regarding the Pain of Others”: Media, Bias and the Coverage of International Disasters
Susan D. Moeller
Journal of International Affairs
Columbia University School of International & Public Affairs
Spring/Summer 2006
Vol. 59, No. 2, Page 173-196
1 April 2006
Mirror at Reuters AlertNet
(Now scrolled off)

Gordon Housworth

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Chinese mercantile absorption of Sub-Saharan and East African infrastructure, energy, mining, development, political and military


Robert Mugabe and Zimbabwe are actually a stellar recommendation for China among African elites, i.e., no matter how despotically my clan and I behave, China will be my protector and lender of last resort against the international community. No one in the West is able, or willing, to make that bargain. I have the luxury of remembering a prosperous Rhodesia under Ian Smith, his UDI (Unilateral Declaration of Independence) from England, the rise of two black parties - Zanu (Zimbabwean African National Union) under Robert Mugabe and Zapu (Zimbabwe African People's Union) under Joshua Nkomo, the creation of Zimbabwe, the marginalization of Nkomo, Mugabe's period as a post-colonial liberation hero, and the trajectory of decline to what is now a prison camp of a nation. For those readers unaware of the sinkhole that nation has become see Frontline's Zimbabwe: Shadows and Lies. Were I an up and coming clan leader bent on control, I'd pick China.

I have long said that much of US and some EU law is nothing but Scottish Enlightenment extraterritoriality to which developing states grudgingly acquiesced as they had few alternatives, especially after the implosion of the USSR. While it could be said that Western financial and development offers to developing regions such as Africa generally seek to alter, or improve, behavior of African states and their elites, China will allow those entities to pursue their kleptocrat proclivities at a rising pace with lessened transparency and with an oversight known only to the Chinese who will use it to their advantage when circumstances require. China will far exceed the Soviets (who tended to focus on geopolitical support and weapons sales) in terms of the scope of their engagement of the developing world. It will be a world where Transparency International will have no lens.

Recently asked to comment on energy related risks in Sub-Saharan Africa, I suspect that the journalist was looking for more tactical responses. My focus was long, on the very access to a wide variety of African energy and mining stocks:

Q: Broadly, what do you assess are the biggest risks faced International Oil Companies (IOCs) operating in sub-Saharan Africa? Are these risks (e.g., kidnapping, legislative) worsening?

ICG: IOCs are about to face a state presence and interference in their operations that will dwarf France. It is too simple to say that Chinese diplomatic and economic assets are ideally equipped to service the kleptocracies and ruling elites of Africa. China's proclaiming of 2006 as the "Year of Africa" is but a milestone in a decade plus effort to turn African allegiance (or dependence) from EU/US states to China, building relationships that will insure entrenchment of African elites, support their states' international interests while freeing them from tiresome covenants and compliance requirements that would limit their spending and off-books saving behavior. In return, African states will increasingly award exploration and lifting rights, mining and ore processing, and integrated infrastructure business to Chinese firms, and will support Chinese regional and global diplomatic initiatives.

Whereas the US has ignored much of Africa and South America, China is executing a strategic plan to create a mercantile structure that secures energy stocks, raw materials, and crops; delivers export markets for commercial and military production; redirects regional elites to study in China, learn Chinese, and specialize in China studies; and extracts diplomatic obedience in supporting Chinese interests and diplomatic initiatives.

Chinese diplomatic efforts differ greatly from those of the US/EU. Whereas the latter might send a small, high level delegation that meets only at senior level, operating against a background of moral and legal strictures, China is able to now field a broad spectrum of diplomatic and consular agents that meet counterparts at each level of the target country's bureaucracy, building a tiered relationship in depth that offers just the correct amount of assistance necessary to achieve the desired behavior. This startlingly efficient and effective process is buttressed by aid with few strings, debt write-offs, shifts toward infrastructure products - which incidentally use Chinese firms and create a camouflaged local posting for People's Liberation Army (PLA) assets, frequent informal meetings and more formal summits that engage African interests and businessmen, and assumption of the role performed by East Germany and Czechoslovakia in training security services and controlling information and media streams.

China is increasingly being accorded the status of a Great Power able to check US/EU interference in the actions of African states and elites, all without the stain of colonialism, moralizing or hegemonism. China's success in, and penetration of, Sudan, Angola and Zimbabwe should be taken as a pointer to future Chinese actions.

Expect China to focus on energy resources in Nigeria, Sudan, Angola, and Gabon. China will seek and gain long-term agreements that lock out US/EU producers while making China less vulnerable to market spot prices in the event of a supply crisis.

Note that a PLA presence in plainclothes has antecedents. From "Cubazuela" with Russian arms, Chinese economic ties, powered by oil - or perhaps not, conclusion:

Unlike Cuba, Venezuela has a very different set of international economic suitors beyond the former Soviet Union, notably China. I find it interesting that China has made inroads in the Caribbean basin (also here) and Venezuela (also here [seen note below] and here), not to mention other areas of Central and South America, that would have brought strident US diplomatic responses had the Soviet Union been the investor. A significant Chinese presence would likely mimic Chinese PLA efforts in Asia and Brazil: a tidewater port presence that offers partial or complete opaqueness connected by a strassendorf (street city) style of satellite towns connected by new roads to a processing plant at the primary extraction asset, e.g., coal, oil, minerals, timber, etc. Such patterns are of interest wherever they occur.

Ask most any African to compare the 2005 US/EU "Year of Africa" (where the US spent its uptick on Ethiopian food relief and Sudan/Darfur peacekeeping relief) with the Chinese 2006 "Year of Africa" that has Beijing signing investments, construction projects, and trade deals across Africa. Chukwu-Emeka Chikezie's Make Poverty History? Make Migration Easy! is ruthless.

Also useful to aspects of this post:

Q: How are these risks affecting the way firms can conduct business in the countries?

ICG: The emergence of China as a deeply entrenched operator will magnify the following comments regarding France, and ultimately marginalize and supplant French influence. For now, the French remain a force in the region, achieving their commercial ends by wielding extensive bribery and, when that fails, destabilization by its military and security forces. US firms bound by the FCPA can be at a disadvantage in competition against the French without assistance from US political and intelligence assets or extremely sound connections to the current and potential regimes.

The French have no qualms in directing their diplomatic, security, intelligence, and military arms to directly support both state-owned and private companies in contests against both host governments and foreign competitors. In areas where the French hold sway, if diplomatic efforts fail then the military will "assist" amenable local constituencies to create an environment agreeable to France. Unless smaller US operators are superbly placed, they can only benefit by allying themselves with one of the US majors, preferably a super major.

To the maximum degree permissible, any US operator should advantage themselves of contacts with US diplomatic and intelligence arms for any information that would affect their commercial position or gain notice of a private US diplomatic effort to convince the French or other state operator to cease and desist in a particular activity.

The majors have had to balance the advantages of being able to reliably extract high-quality oil at an operating cost of $2 to $5 dollars a barrel against the onshore hassle of coping with sabotage from organized crime, obstruction from local communities who feel bitter and marginalized as oil revenues pass them by, the effects of civil war, poor onshore infrastructure, and fees from the host government for daily use of local services that do exist.

There is currently less risk in being offshore - deeply offshore; the big money strikes in terms of large, deep fields with good recovery and reserves are increasingly in deep water where the host government is intensely dependent on the expertise, technology and capital of the field operator and its partners. Assets in shallow littoral waters will increasingly be prone to excursions from shore. Governments are less prone to interfere with the super majors. For US IOCs, be offshore in partnership with at least one other major US player, or failing that, offshore in partnership with at least one major non-US player that has similar interests and risk assessments. Areas where the French have an overwhelming presence carry added risk. That caution will increasingly apply to areas where the Chinese have a commanding presence.

Al Qaeda has a strong presence in West Africa and a presence in Nigeria, but has been heretofore content with revenue generation by smuggling, money laundering and purchase and resale of blood diamonds.

Q: In particular what special challenges does Nigeria, Chad/Sudan and Angola pose to IOCs?

ICG: The most immediate point of collision between the US and China are the energy states of the Gulf of Guinea, notably Nigeria, Equatorial Guinea and Cameroon, where both the US and China draw a fifth of their current supplies.

Sudan is well on its way to becoming a Chinese supplier, which will put increasing pressure on Chad.

Angola's proclivities towards opaque dealings will grow as Chinese cooperation increases.

China will seek and gain long-term agreements that lock out US/EU producers while making China less vulnerable to market spot prices in the event of a supply crisis.

Q: Is Angola showing any signs of being more transparent in its dealings?

ICG: We do not expect Angola to increase transparency. Increasing Chinese support is expected to reduce transparency, reinforce the ruling elite, and keep royalties flowing to the capital.

Q: Are IOC/contractor employees in Nigeria under any special risks?

ICG: IOC/contractor employees will increasingly be prone to kidnapping on onshore and near-shore assets as kidnappers use the captives, and subsequent production interruption, as a bargaining chip to force greater royalty sharing from the capital.

Q: Do IOCs have to be concerned that the nationalization policy of energy assets in south America may take root in parts of southern Africa?

ICG: Expropriation at the state level has ebbed for the foreseeable future as Marxist/Socialist governments yielded to more commercially minded administrations that are rapidly becoming sensitive to international lending institutions and the capital markets. Our near to midterm concern is what we call the Balouchi effect in which there is de facto expropriation in which the host government then in power faces unrest that brings bands of thugs who halt operations, makes life untenable for the operating firm, forces evacuation, and then absorbs the abandoned assets, becoming in effect, a new local government in power that is unresponsive in the short term to external influence. While there will be interruptions, possibly some asset damage, we believe the primary effect will be reduced monies to the legal owners rather than reassignment to new operators. Oil, gas, and gaseous liquids sectors in Nigeria are susceptible.

Other comments:

The economic and political-legal factors affecting investment are consistent across West Africa, i.e., an extended family oligopoly or elite that can edge towards kleptocracy and is bent on enrichment. Extensive distribution of financial largess within the family is assumed as a cultural norm. To not do so is seen as a mark of disrespect, even selfishness and mismanagement, within the clan.

Behind-the-scenes payments are often paid to increase chances of obtaining a permit, and in the US environment these take the form of signing bonuses. These payments vary widely by country and are simply part of an ongoing relationship.

Foreign companies are often expected to pay a substantial non-recoverable signature bonus in order to secure rights to a particular field. As these payments are not tax deductible, their existence guarantees that only major multinationals are able to fund operations in the major states of West Africa -- Angola and Nigeria -- unless their bloc is extraordinarily remunerative.

On the bright side, the International Finance Corporation (IFC) is committed to bringing coherence to best practices in economic development efforts across the globe that rise from mining, oil and gas, topping off good programs where they find them.

Soon: Coltan extraction as a metaphor of African exploitation by internal and external parties

Zimbabwe: Shadows and Lies
Alexis Bloom, REPORTER/PRODUCER; William A. Anderson, David Ritsher & Jeffrey Friedman, EDITORS
AIRS ON PBS June 27, 2006

China and Saudi Arabia: interesting SPR team up?
China may tap Saudis to fill its oil reserve, a move likely to influence prices
Myra Saefong's Commodities Corner
Myra P. Saefong, MarketWatch
Last Update: 12:04 PM ET Jun 23, 2006

Mercantilism with Chinese Characteristics
China Confidential
June 23, 2006

China's Portuguese Connection
China grooms a strategic relationship with the Community of Portuguese Language Countries
Loro Horta & Ian Storey
YaleGlobal, 22 June 2006

China Easing Its Stance On Taiwan
Tolerance Grows For Status Quo
By Edward Cody
Washington Post
June 15, 2006

In Africa, China Trade Brings Growth, Unease
Asian Giant's Appetite for Raw Materials, Markets Has Some Questioning Its Impact on Continent
By Craig Timberg
Washington Post
June 13, 2006

China's Impact On Africa
Posted by Dan Harris
China Law Blog
June 10, 2006 at 04:05 PM

China Impacts Developing World
Chinese entrepreneurs look to Africa for new markets
Bright B. Simons (baronsimon)
Published 2006-06-10 21:00 (KST)

China's Africa Strategy
By Joshua Eisenman and Joshua Kurlantzick
Current History 5/06
May 11, 2006, 09:33
Fee archive

The Roots of African Corruption
Stephen Ellis
CURRENT HISTORY, May 2006, pp 203
Cache of PDF

With China Calling, Is It Time to Say Goodbye to US And Europe?
Mark Sorbara
April 13, 2006

Western concern at China's growing involvement in Africa
By Brian Smith
World Socialist Web Site
10 April 2006
NOTE: WSWS texts can be loopy. This is sound.

Monitoring China's meddling
By Tom Donnelly
Armed Forces Journal
March 2006

China's growing trade with Africa indicative of Sino-Western energy conflicts
By Brian Smith
World Socialist Web Site
24 January 2006
NOTE: Also sound

Full text: China's African Policy
China View 2006-01-12 11:45:28

China's Costly Quest for Energy Control
New York Times
June 27, 2005

Oil Fuels Beijing's New Power Game
China's search for secure energy sources and supply routes is leading to significant strategic adjustments
Ziad Haider
11 March 2005

China's success could misguide region's leaders
Andres Oppenheimer
Miami Herald
Posted on Sun, Feb. 27, 2005

A Continent for the Taking : The Tragedy and Hope of Africa
by Howard W. French
Knopf, ISBN: 0375414614
April 20, 2004
Nice set of commentary and reviews that can stand on their own

Gordon Housworth

InfoT Public  Risk Containment and Pricing Public  Strategic Risk Public  


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Double edged sword of optimizing China-based and US/EU-based supply chains


Bleeding our China-monitoring interests over to logistics, I highly recommend two articles by George Stalk at BCG on the trade-offs between China-based and North American-based supply chains. The first is the HTML article from Supply Chain Management Review, Surviving the China Riptide, and the more developed PDF article from BCG, The China Rip Tide: Threat or Opportunity?

Stalk portrays the scope of the problem in trying to improve China-based chains as reaching epidemic proportions (Quotes below are from the HTML version):

[The] surface freight situation in North America and Europe is seriously challenged. Backlogs at ports and on railroads are at all-time highs. With freight volumes increasing faster than the ports can handle them, the situation will only worsen. Some Asian ships are too big to go through the Panama Canal to less busy ports on the Atlantic coast. Even some of those that can fit through the canal must offload and reload containers to meet the canal's pilot-visibility rules. The offloaded containers are sent by rail across the isthmus to be reloaded on the other side, adding even more transit time. And while shifting to East Coast ports might improve the predictability of shipping times, it certainly won't shorten them. Because of the problems on the North American West Coast and in Europe, the cycle times of the China supply chains are going up, not down... The cycle times of surface shipments (from China to Chicago, for example) are not only increasing - they are also becoming more variable. About 50 percent of the containers at one shipping company are offloaded within two weeks of their scheduled dates, and these are considered to be on time. The other 50 percent are even less predictable!

George was working on what became time-based competition (TBC) in the mid 80s, and released his seminal Time-The Next Source of Competitive Advantage in 1988. I had the opportunity to design integrated marketing and development programs around TBC as did a colleague at DEC. We can testify that TBC works. It's my opinion that Stalk has long had a subtle feel for the impact of timing and bullwhip effects, and it is evident here.

I submit that the 'Riptide pair' form the kernel of a "graduate survey course" for commercial supply chain and logistics managers. For those with chains in place, remedial protective measures are in order; for those designing chains, these mechanics should be factored into sourcing/siting decisions. Some of this has been known at the grassroots level, for example, while smaller part production left Mexico for Asia, assembly of "things larger than a breadbasket" stayed put. That feature will multiply if Ford goes ahead with leaked plans to site a new assembly plan in Mexico. (I admit to wondering if it was not leaked intentionally. The leak, if it was one, softened what could be an implied threat to nationalistic voters in the upcoming July Mexican presidential election as well as advising the UAW to 'roll over and play dead' in terms of its labor negotiations with the OEM.)

In their rush to source from China, many companies are blindly walking into a strategic trap. The trap is thinking that sourcing from China will result in lower product costs when, in reality, the supply chain dynamics will drive up overall costs and reduce profitability - thereby creating an opening for a competitor. Their only salvation is if all their competitors make the same mistake... The first company to see and correct the strategic error of sourcing from China without an appropriate investment in supply chain dynamics to minimize costs will seal the fate of its competitors.

There are many traps in going to China; the one that concerns us is Intellectual Property (IP) loss now at a hemorrhage level; in the automotive sector, the OEMs are comissive in stampeding their Tier Base to China based purely on piece part cost, a shortsighted practice that will come back to haunt both OEM and supplier. For those chains that can be retained here, the supply base has the opportunity - but not the guarantee (as an asset is at risk wherever it appears at any tier in the global supply chain) - of less predation upon strategic IP.

SwizStick at Third Paty Logistics captures Stalk's double edged sword, i.e., that US/EU suppliers can and should reoptimize their chains on total cost but that Chinese firms can again win the advantage by optimizing their chains with a built-in lower Unit Product Cost (UPC):

[Stalk analyzes] the hidden costs of a product that arise from fluctuations and challenges in the supply chain. His analysis is very technical and lengthy but is an excellent example of how companies who optimize their supply chain, integrating information flows and cutting cycle times, will have the advantage over their competitors. What I found extremely interesting and illuminating was the results of the analysis comparing a domestic supply chain to a China-based supply chain, clearly illustrating that a domestic supply chain that could optimize their information flows and cycle times would have a substantial operating margin advantage over the China-based supply chain. The author readily concedes that "...the competitive dynamic might continue with the China-based chain becoming integrated and also cutting its cycle time in half. In that case, the advantage returns to the China-based chain because of its lower UPC."

In a similar vein, Brian Sommer stated that Stalk had illuminated:

the true costs of using local, global and a mix of suppliers. The article takes the reader through a series of cost analyses assuming different combinations of US or China manufacturers and whether they possess non-integrated, semi-integrated or fully integrated supply chains. Stalk's analysis helps to understand why some firms:

  • move/keep much of their sourcing in-country
  • develop their own transportation solutions
  • rethink how much of each part should be made by country location
  • why some firms are re-routing offshore shipments to different, less congested ports
  • etc.

But more important, Stalk's analysis is great at understanding how Chinese firms may try to enter and win in the US market. His suggestions for US manufacturers/assemblers on how to win this competitive battle are a must read.

US/EU firms should investigate the implications of Stalk's analysis in concert with a realistic assessment of the financial impact of lost IP. The combination of the two would significantly modify existing supply chains. The institution of actionable and effective IP retention processes would then offer the suppliers

Rather than blindly bringing chains home or adding capacity to as yet uncongested ports, Stalk recommends that firms "need to be very aggressive in managing their China-based supply chains, looking for ways to squeeze time from them that competitors haven't identified. For companies that haven't yet sourced from China, [Stalk recommends] the following steps":

  • Reduce minimum-production-order quantities and reduce cycle times as quickly and as much as possible.
  • Don't source or manufacture in China until management fully understands the dynamics of the supply chains.
  • Create an integrated or a semi-integrated information flow within the company's existing supply chain.
  • Conduct in-depth examinations of buying practices and supplier relationships management at all levels of the supply chain. Then identify and prevent potential hidden costs.
  • Segment the demand chain on the basis of order predictability and demand volatility so that components with the highest gross margins and the most volatile demand get the fastest handling.
  • If a company does decide to source from or manufacture in China, it should explore alternatives that will minimize adverse supply chain effects. These alternatives may include options that appear costly but actually result in overall lower costs. For example:

  • Using air freight for products with the highest margins and volatility.
  • Insisting on point-to-point ocean shipping. To reduce costs, shipping companies build larger and larger container carriers, which must then be scheduled to call on multiple ports. Shipping products on a vessel that has your destination as its last port of call can add weeks - and great variability - to transit times.
  • Developing better relationships with transportation providers. This could mean paying the shipping company for preferential treatment. In "hot hatching," for example, you offer a premium to a shipping company that will load your goods onto its vessel last and unload them first. Another option is to work with the few shipping companies able to offload containers directly onto rail cars that are then expressed east - cutting days and sometimes weeks out of the supply chain.

Add IP risk mediation to this mix and firms operating in, or contemplating operations in, China would be well served; firms performing competitive analysis of potential Chinese competitors would have a new calculus for designing a competitive response.

Recommended read. While China is an especially difficult example of supply chain constraint, these guidelines can be generalized to any global supply chain.

"Surviving the China riptide."
by SwizStick @ 4:46 pm.
Third Paty Logistics
June 15, 2006

Ford to invest billions in Mexico: report
June 14, 2006 01:17 PM ET

The China Riptide / Risky Supply Chains
Brian Sommer
Spend Matters
Posted At : June 6, 2006 1:13 PM

The China Rip Tide: Threat or Opportunity?
Profiting from the Growing Supply-Chain Bottleneck
By George Stalk Jr. and Kevin Waddell
Boston Consulting Group
June 2006

Surviving the China Riptide
By George Stalk Jr.
Supply Chain Management Review
May 1, 2006

The 10 Lives of George Stalk
By Jennifer Reingold
Fast Company
Issue 91, February 2005

It Is The Relative Speed That Counts
Roshni Jayakar
Interview with George Stalk
Business Today
July 1999

Time-The Next Source of Competitive Advantage
George Stalk, Jr
Harvard Business Review
66, July-August 1988
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Gordon Housworth

InfoT Public  Intellectual Property Theft Public  Risk Containment and Pricing Public  Strategic Risk Public  


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