After the Rain : how the West lost the East Part 28

Something must be done about it not only from the economic point of view. Intellectual products are very price sensitive and highly elastic. Lower prices will be more than compensated for by a much higher sales volume. There is no other way to explain the pirate industries: evidently, at the right price a lot of people are willing to buy these products. High prices are an implicit trade-off favouring small, elite, select, rich world clientele. This raises a moral issue: are the children of Macedonia less worthy of education and access to the latest in human knowledge and creation?

Two developments threaten the future of intellectual property rights.

One is the Internet. Academics - fed up with the monopolistic practices of professional publications - already publish there in big numbers. I published a few book on the Internet and they can be freely downloaded by anyone who has a computer or a modem. There are electronic magazines, trade journals, billboards, professional publications, thousand of books are available full text. Hackers even made sites available from which it is possible to download whole software and multimedia products. It is very easy and cheap to publish in the Internet, the barriers to entry are virtually nil, pardon the pun. Web addresses are provided free of charge, authoring and publis.h.i.+ng software tools are incorporated in most word processors and browser applications. As the Internet acquires more impressive sound and video capabilities it will proceed to threaten the monopoly of the record companies, the movie studios and so on.

The second development is also technological. The oft-vindicated Moore's law predicted the doubling of computer memory capacity every 18 months. But memory is only one aspect. Another is the rapid simultaneous advance on all technological fronts. Miniaturization and concurrent empowerment of the tools available has made it possible for individuals to emulate much larger scale organizations successfully. A single person, sitting at home with 5000 USD worth of equipment can fully compete with the best products of the best printing houses anywhere. CD-ROMs can be written on, stamped and copied in house. A complete music studio with the latest in digital technology has been condensed to the dimensions of a single software. This will lead to personal publis.h.i.+ng, personal music recording and the digitisation of plastic art. But this is only one side of the story.

The relative advantage of the intellectual property corporation was not to be found exclusively in its technological prowess. Rather it was in its vast pool of capital and its marketing clout, market positioning, sales and distribution. Nowadays, anyone can print a visually impressive book, using the above-mentioned cheap equipment. But in an age of an information glut, it is the marketing, the media campaigns, the distribution and the sales that used to determine the economic outcome.

This advantage, however, is also being eroded. First, there is a psychological s.h.i.+ft, a reaction to the commercialisation of intellect and spirit. Creative people are repelled by what they regard as an oligarchic establishment of inst.i.tutionalised, lowest common denominator art and they are fighting back. Secondly, the Internet is a huge (200 million people), truly cosmopolitan market with its own marketing channels freely available to all. Even by default, with a minimum investment, the likelihood of being seen by surprisingly large numbers of consumers is high.

I published one book the traditional way - and another on the Internet.

In 30 months, I have received 2500 written responses regarding my electronic book. This means that well over 75,000 people read it (the industry average is a 3% response rate and my Link Exchange meter indicates that 160,000 people visited the site by February 2000, with well over 630,000 impressions in the last 15 months alone). It is a textbook (in psychopathology) - and 75,000 people (let alone 160,000) is a lot for this kind of publication. I am so satisfied that I am not sure that I will ever consider a traditional publisher again. Indeed, my next book is being published in the very same way.

The demise of intellectual property has lately become abundantly clear.

The old intellectual property industries are fighting tooth and nail to preserve their monopolies (patents, trademarks, copyright) and their cost advantages in manufacturing and marketing.

But they are faced with three inexorable processes, which are likely to render their efforts vain:

The Newspaper Packaging

Print newspapers offer package deals of subsidized content (sold for a token amount) and subsidizing advertising. In other words, the advertisers pay for content formation and generation and the reader has no choice but be exposed to commercial messages as he or she studies the contents.

This model - adopted earlier by radio and television - rules the Internet now and will rule the wireless Internet in the future. Content will be made available free of all pecuniary charges. The consumer will pay by providing his personal data (demographic data, consumption patterns and preferences and so on) and by being exposed to advertising.

Thus, content creators will benefit only by sharing in the advertising cake. They will find it increasingly difficult to implement the old model of royalties paid for access or owners.h.i.+p of intellectual property. The venerable (and expensive) "Encyclopaedia Britannica" is now fully available on-line, free of charge. Its largesse is supported by advertising.

Disintermediation

A lot of ink has been spilt regarding this important trend. The removal of layers of brokering and intermediation - mainly on the manufacturing and marketing levels - is a historic development (though the continuation of a long term trend). Consider music for instance.

Streaming audio on the Internet or MP3 files, which the consumer can download will render the CD obsolete. The Internet also provides a venue for the marketing of niche products and reduces the barriers to entry previously imposed by the need to engage in costly marketing ("branding") campaigns and manufacturing activities.

This trend is also likely to restore the balance between artist and the commercial exploiters of his product. The very definition of "artist"

will expand to include all creative people. Everyone will seek to distinguish oneself, to "brand" himself and to auction her services, ideas, products, designs, experience, etc. This is a return to pre-industrial times when artisans ruled the economic scene. Work stability will vanish and work mobility will increase in a landscape of s.h.i.+fting allegiances, head hunting, remote collaboration and similar labour market trends.

Market Fragmentation

In a fragmented market with a myriad of mutually exclusive market niches, consumer preferences and marketing and sales channels - economies of scale in manufacturing and distribution are meaningless.

Narrow casting replaces broadcasting, ma.s.s customisation replaces ma.s.s production, a network of s.h.i.+fting affiliations replaces the rigid owned-branch system. The decentralized, intrapreneurs.h.i.+p-based corporation is a late response to these trends. The mega-corporation of the future is more likely to act as a collective of start-ups than as a h.o.m.ogeneous, uniform (and, to conspiracy theorists, sinister) juggernaut it once was.

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Scavenger Economies, Predator Economies

The national economies of the world can be divided to the scavenger and the predator types. The former are parasitic economies, which feed off the latter. The relations.h.i.+p is often not that of symbiosis, where two parties maintain a mutually beneficial co-existence. Here, one economy feeds off others in a way, which is harmful, even detrimental to the hosts. But this interaction - however undesirable - is the region's only hope.

The typology of scavenger economies reveals their sources of sustenance:

Conjunctural - These economies feed off historical or economic conjunctures or crises. They position themselves as a bridge between warring or conflicting parties. Switzerland rendered this service to n.a.z.i Germany (1933-1945), Macedonia and Greece to Serbia (1992 to the present), Cyprus aided and abetted Russia (1987 to the present), Jordan for Iraq (1991 to the present), and now, Montenegro acts the part for both Serbia and Kosovo. These economies consist of smuggling, siege breaking, contraband, arms trade and illegal immigration. They benefit economically by violating both international and domestic laws and by providing international outcasts and rogues with alternative routes of supply, and with goods and services.

Criminal - These economies are infiltrated by criminal gangs or suffused with criminal behaviour. Such infiltration is two phased: the properly criminal phase and the money laundering one. In the first phase, criminal activities yield income and result in wealth acc.u.mulation. In the second one, the money thus generated is laundered and legitimised. It is invested in legal, above-board activities. The economy of the USA during the 19th century and in the years of prohibition was partly criminal. It is reminiscent of the Russian economy in the 1990s, permeated by criminal conduct as it is. Russians often compare their stage of capitalist evolution to the American "Wild West".

Piggyback Service economies - These are economies, which provide predator economies with services. These services are aimed at re-establis.h.i.+ng economic equilibrium in the host (predator) economies.

Tax shelters are a fine example of this variety. In many countries taxes are way too high and result in the misallocation of economic resources. Tax shelters offer a way of re-establis.h.i.+ng the economic balance and re-instating a regime of efficient allocation of resources.

These economies could be regarded as external appendages, shock absorbers and regulators of their host economies. They feed off market failures, market imbalances, arbitrage opportunities, shortages and inefficiencies. Many post-Communist countries have either made the provision of such services a part of their economic life or are about to do so. Free zones, off sh.o.r.e havens, off sh.o.r.e banking and trans.h.i.+pment ports proliferate, from Macedonia to Archangelsk.

Aid economies - Economies that derive most of their vitality from aid granted them by donor countries, multilateral aid agencies and NGOs.

Many of the economies in transition belong to this cla.s.s. Up to 15% of their GDP is in the form of handouts, soft loans and technical a.s.sistance. Rescheduling is another species of financial subsidy and virtually all CEE countries have benefited from it. The dependence thus formed can easily deteriorate into addiction. The economic players in such economies engage mostly in lobbying and in political manoeuvring - rather than in production.

Derivative or Satellite economies - These are economies, which are absolutely dependent upon or very closely correlated with other economies. This is either because they conduct most of their trade with these economies, or because they are a (marginal) member of a powerful regional club (or aspire to become one), or because they are under the economic (or geopolitical or military) umbrella of a regional power or a superpower. Another variant is the single-commodity or single-goods or single-service economies. Many countries in Africa and many members of the OPEC oil cartel rely on a single product for their livelihood.

Russia, for instance, is heavily dependent on proceeds from the sale of its energy products. Most Montenegrins derive their livelihood, directly or indirectly, from smuggling, bootlegging and illegal immigration. Drugs are a major "export" earner in Macedonia and Albania.

Copycat economies - These are economies that are based on legal or (more often) illegal copying and emulation of intellectual property: patents, brand names, designs, industrial processes, other forms of innovation, copyrighted material, etc. The prime example is j.a.pan, which constructed its whole mega-economy on these bases. Both Bulgaria and Russia are Meccas of piracy. Though prosperous for a time, these economies are dependent on and subject to the vicissitudes of business cycles. They are capital sensitive, inherently unstable and with no real long term prospects if they fail to generate their own intellectual property. They reflect the volatility of the markets for their goods and are overly exposed to trade risks, international legislation and imports. Usually, they specialize in narrow segments of manufacturing which only increases the precariousness of their situation.

The Predator Economies can also be cla.s.sified:

Generators of Intellectual Property - These are economies that encourage and emphasize innovation and progress. They reward innovators, entrepreneurs, non-conformism and conflict. They spew out patents, designs, brands, copyrighted material and other forms of packaged human creativity. They derive most of their income from licensing and royalties and const.i.tute one of the engines driving globalisation. Still, these economies are too poor to support the complementary manufacturing and marketing activities. Their natural counterparts are the "Industrial Bases". Within the former Eastern Bloc, Russia, Poland, Hungary and Slovenia are, to a limited extent, such generators. Israel is such an economy in the Middle East.

Industrial Bases - These are economies that make use of the intellectual property generated by the former type within industrial processes. They do not copy the intellectual property as it is. Rather, they add to it important elements of adaptation to niche markets, image creation, market positioning, packaging, technical literature, combining it with other products or services, designing and implementing the whole production process, market (demand) creation, improvement upon the originals and value added services. These contributions are so extensive that the end products, or services can no longer to be identified with the originals, which serve as mere triggers. Again, Poland, Hungary, Slovenia (and to a lesser extent, Croatia) come to mind.

Consumer Oriented economies - These are Third Wave (Alvin Toffler's term), services, information and knowledge driven economies. The over-riding set of values is consumer oriented. Wealth formation and acc.u.mulation are secondary. The primary activities are concerned with fostering markets and maintaining them. These "weightless" economies concentrate on intangibles: advertising, packaging, marketing, sales promotion, education, entertainment, servicing, dissemination of information, knowledge formation, trading, trading in symbolic a.s.sets (mainly financial), spiritual pursuits, and other economic activities which enhance the consumer's welfare (pharmaceuticals, for instance).

These economies are also likely to sport a largish public sector, most of it service oriented. No national economy in CEE qualifies as "Consumer Oriented", though there are pockets of consumer-oriented entrepreneurs.h.i.+p within each one.

The Trader economies - These economies are equivalent to the cardiovascular system. They provide the channels through which goods and services are exchanged. They do this by trading or a.s.suming risks, by providing physical transportation and telecommunications, and by maintaining an appropriately educated manpower to support all these activities. These economies are highly dependent on the general health of international trade. Many of the CEE economies are Trader economies.

The openness ratio (trade divided by GDP) of most CEE countries is higher than the G7 countries'. Macedonia, for instance, has a GDP of 3.6 Billion US dollars and exports and imports of c. 2 billion US dollars. These are the official figures. Probably, another 0.5 billion US dollars in trade go unreported. Additionally, it has one of the lowest weighted customs rate in the world. Openness to trade is an official policy, actively pursued.

These economies are predatory in the sense that they engage in zero-sum games. A contract gained by a Slovenian company - is a contract lost by a Croatian one. Luckily, in this last decade, the economic cake tended to grow and the sum of zero sum games was more welfare to all involved.

These vibrant economies - the hope of benighted and blighted regions - are justly described as "engines" because they pull all other (scavenger) economies with them. They are not likely to do so forever.

But their governments have a.s.similated the lessons of the 1930s.

Protectionism is bad for everyone involved - especially for economic engines. Openness to trade, protection of property rights and functioning inst.i.tutions increase both the number and the scope of markets.

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Market Impeders and Market Inefficiencies