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Sunday, 28 March 2004

>> AHEM...

'Let it happen' - Richard Clarke helped bin Laden family flee United States after 9/11
As counterterrorism czar, Richard Clarke helped the al Qaeda leader's family out of the US.
Former National Security Council counterterrorism czar Richard Clarke approved the evacuation of Osama bin Laden's relatives from the United States after the September 11, 2001 attacks.
"It was Clarke who personally authorized the evacuation by private plane of dozens of Saudi citizens, including many members of Osama bin Laden's own family, in the days immediately following September 11," the Boston Herald notes in a March 26 editorial.
According to the Herald, "Clarke's role was revealed in an October 2003 Vanity Fair article. 'Somebody brought to us for approval the decision to let an airplane filled with Saudis, including members of the bin Laden family, leave the country,' Clarke told Vanity Fair. 'My role was to say that it can't happen unless the FBI approves it. . . And they came back and said yes, it was fine with them. So we said "Fine, let it happen."'
"Vanity Fair uncovered that the FBI never fully investigated the passengers on those privately chartered flights (one of which flew out of Logan International Airport after scooping up a dozen or so bin Laden relatives.) But Clarke protested to Vanity Fair that policing the FBI was not in his job description."


Hamas linked to area housing

By Jerry Seper

The terrorist organization Hamas invested millions of dollars during the past decade in real-estate projects nationwide, including in suburban Maryland, as part of a scheme to raise cash to fund acts of terrorism, records show.
The investments -- involving the construction of hundreds of new homes, including many in Oxon Hill -- were handled through BMI Inc., a defunct Secaucus, N.J., investment firm founded by Soliman S. Biheiri, an Egyptian and Hamas supporter, according to a newly released sentencing declaration by U.S. Immigration and Customs Enforcement (ICE).
In the declaration, ICE senior agent David Kane said Biheiri, sentenced in January to a year in prison on immigration violations, used the firm beginning in 1991 to raise "large amounts of money" through investments and as a front to route cash from more than 100 bogus Hamas charities and businesses, most of which operated in Virginia.
The Oxon Hill investment included a project known as Barnaby Knolls, financed by a BMI subsidiary BMI Real Estate Development Inc., the declaration said. Begun in January 1991, it involved the construction of 57 homes in the working-class Prince George's County neighborhood.
ICE agents refer to the project as "Hamas West," although no one living in the subdivision has been identified as being involved in the scheme or with the terrorist organization that is pursuing a Palestinian state.
One of the principle BMI investors in the Oxon Hill project, according to the Kane declaration, was Mousa Mohammad Abu Marzook, the self-proclaimed political leader of Hamas detained by U.S. authorities in 1995 on suspicion of being involved in terrorist activities. He later was expelled to Jordan, where he was deported to Syria for his ties to Hamas.
The U.S.-educated Marzook, who had lived in Falls Church, has been named by Israeli authorities on charges of murder, attempted murder, manslaughter and conspiracy in truck and bus bombings in Israel that killed 14 and injured 56. He also is accused of ordering the killing of 37 others in Hamas attacks in Israel.
According to the declaration, Marzook told a confidential U.S. Customs Service informant during a May 1991 meeting in Ruston, La., that he "has and currently is investing money with BMI," including a real-estate project in Oxon Hill, where he intended to build "more than 56 homes." In the tape-recorded conversation, Marzook noted that the suburban Maryland site was close to Washington.
According to the declaration, more than $1 million was invested by BMI in various real-estate projects, many of which are described but not identified.
The declaration said hundreds of thousands of dollars invested in the projects was returned to investors or were re-invested in other real-estate developments, with much of the cash being routed through banks in Virginia and New Jersey to Dubai in the United Arab Emirates. It said significant amounts of cash obtained in the real-estate ventures were used "in furtherance of Hamas terrorist operations."
It was a U.S. investigation into Marzook's financial activities in this country that led to Biheiri, BMI and Ptech, a Boston-based computer software firm raided by customs agents in December 2002, authorities said. They said Biheiri and Yasin Qadi, a key BMI investor, were the primary Ptech financiers.
Qadi, a Saudi multimillionaire, was listed by the Treasury Department in 2002 as a terrorist and is thought by authorities to have diverted millions of dollars to Osama bin Laden's al Qaeda network through various charitable organizations.
Biheiri was a key figure in a scheme using private companies and interrelated Islamic charities operating out of business fronts in Herndon and Falls Church to divert millions of dollars to global terrorists, including Hamas and al Qaeda.
In 2002, federal agents raided 14 Islamic businesses in Virginia, seizing computers, bank statements and other documents in a customs investigation known as "Operation Green Quest." That probe focused on what authorities called a "financial relationship between" BMI and a Herndon corporation Sana-Bell Inc.
Authorities said Sana-Bell existed to generate funds for a Falls Church-based charity known as the International Islamic Relief Organization (IIRO). In an affidavit filed in connection with the Green Quest investigation, Mr. Kane said the CIA listed the IIRO as having "extremist connections" to Hamas and Al-Gamaa Al-Islamiya, the Egyptian terrorist organization that served as a precursor to al Qaeda.
Hamas was designated by the State Department as a terrorist organization in 1991. Although the number of hard-core members is unknown, supporters and sympathizers have been placed in the tens of thousands. Much of its fund raising takes place in the United States.

A dangerous stalemate in Venezuela

Venezuelan President Hugo Chavez has been able to relegate a recall drive on his government to a kind of bureaucratic netherworld. This maneuvering hasn't stanched mounting tensions, though, and may well lead to a series of violent demonstrations. Such a conflict would test the ability of the regional players, such as the Organization of American States (OAS) and Brazil, to deal with a crisis.
At issue is a petition drive held last year calling for a recall referendum on the Chavezgovernment.Recently, Venezuela's electoral chamber of the Supreme Court cleared the way for a recall vote by finding that an electoral committee -- created to oversee the referendum drive -- was wrong in rejecting 876,000 signatures on mere technicalities. This gave the opposition more than the 2.43 million signatures needed to hold a referendum. But on Tuesday, the constitutional chamber of the court -- which is headed by Ivan Rincon, a staunch Chavez ally -- rejected the jurisdiction of the electoral chamber. That decision can be appealed to the full court, which is also headed by Mr. Rincon.
The current impasse helps Mr. Chavez run out the clock. According to the Venezuelan constitution, if a referendum isn't held by Aug. 19, then the Venezuelan people could vote against the Chavez government in a recall, but his vice president would remain in charge for the current term. Given the recent bureaucratic gyrations, it is highly unlikely a referendum could be held by the August deadline. In either scenario, "the opposition will probably react by trying to force [Mr. Chavez] out of power in a less formal way," said Ricardo Amorim, head of Latin America Research at IDEAglobal. This would probably lead to "confrontation on the streets, with very likely people getting killed," he added. Although it is unlikely such a confrontation would cause the same economic trauma as the general strike called at the end of 2002, it could still reverse Venezuela's oil-driven rebound. However, such a crisis is not expected to have any substantive impact on the global oil market.
Brazil, other Latin American countries and the United States should make clear to Mr. Chavez that his government could face international sanction should the OAS denounce the referendum process. The OAS must be the arbiter of the legitimacy of the process. Should Mr. Chavez abide by his obligations and prevail, the opposition must be firmly told that its efforts to unseat him before the 2006 elections have no backing.
Should the parties delay in alerting Mr. Chavez that they are unified in supporting whatever conclusions the OAS reaches, Mr. Chavez and his supporters could become entrenched in positions they may be unwilling to reverse for political reasons. Applying some pressure on Mr. Chavez now could yield stability for the country and the region.


Venezuela forces tortured protesters -ombudsman
CARACAS, Venezuela, March 25 (Reuters) - Venezuelan security forces tortured some protesters detained during recent anti-government demonstrations, but did not shoot and kill demonstrators, the state ombudsman said on Thursday.
In a report to the National Assembly, German Mundarain, a state official who investigates complaints against public authorities, said nine civilians were killed in street clashes between troops, police and opposition protesters between Feb. 27 and March 5 in Caracas and other cities.
Human rights groups have accused President Hugo Chavez's government of using excessive force to control the protesters, who were demanding that Chavez submit to a recall referendum.
They cited cases of shootings, beatings and torture.
The left-wing president, who is resisting the opposition vote petition, has denied there were rights abuses, condemned the pro-referendum protesters as armed subversives and praised the actions of his security forces.
Mundarain, who has been repeatedly accused by the opposition of being biased in favor of the government, said 193 people were injured during the disturbances and 513 were detained, although most were quickly released.
"These detentions gave rise to cases in which some officers went beyond the legitimate use of force," he said in the report, citing seven cases of torture and 17 of "cruel, inhumane or degrading treatment."
Human rights groups said detainees were subjected to severe beatings, burnings, electric shocks and mock executions.
The ombudsman urged the government to investigate these cases and prosecute those responsible if necessary, but also accused opposition leaders of "instigating violence" and said troops and police were fired on.
Mundarain said no deaths could be attributed so far to security forces because none of the deadly shooting injuries were caused by the regulation automatic rifles they carried.
Opposition leaders and a local human rights group put the death toll at 14, and cite eyewitness reports that troops killed some protesters. Witnesses say unidentified civilian gunmen also opened fire.
Opponents of former paratrooper Chavez, who was elected in 1998, accuse him of becoming increasingly dictatorial and repressive. He dismisses his enemies as U.S.-backed "oligarchs" trying to end his "revolution" seeking to fight poverty in the world's No. 5 oil exporter.


Congressional talks on pension plan stall

House and Senate negotiators yesterday hit an angry impasse over legislation that could save employers billions of dollars, with just days left before companies must begin making their quarterly pension payments.
There were no immediate plans to revive negotiations on the bill, which would provide employers two years of relief on payments they make into their pension plans. During that interval, Congress would work on long-term legislation to ensure viability of the pension system and retirement incomes of American workers.
Rep. John A. Boehner, Ohio Republican and chairman of the House Education and the Workforce Committee, said Democrats had rejected a compromise offer that "was as far as we could go."
Democrats, led by Sen. Edward M. Kennedy, of Massachusetts, put the blame on the White House.
Mr. Kennedy said the Bush administration leaned on Republicans to resist help for union-based multiemployer pension plans, which he said "reflects an ideological viewpoint."
The deadlock complicates efforts to pass a compromise bill next week, before Congress leaves for its spring recess, and dims hopes that companies sponsoring single-employer plans will have new guidelines before April 15, when many have to make quarterly contributions.
The two sides are in general agreement on single-employer plans, which face the most serious financial problems and are the main focus of the bill.
The bill would determine a new corporate bond-based interest rate that would be used for the next two years to replace a formula, based on a very low interest rate, that has caused contributions to soar.
The Pension Benefit Guaranty Corp. (PBGC), a government agency that insures the pensions of about 44 million American workers, estimated the new rate would save companies $80 billion, which could be used for new hiring and economic expansion and could save some plans from bankruptcy.
Without the fix, companies "are going to have to divert money that they could otherwise put back in their business," said Dorothy Coleman, vice president for tax policy at the National Association of Manufacturers. "This is a critical issue to our economy."
Asghar Alam, U.S. retirement practice leader at Mercer Human Resource Consulting, wrote the negotiators this week that, without quick action, companies may not be able to meet the contribution deadline. That, Mr. Alam wrote, would pose a risk to companies that they would contribute cash that would not be deductible or that they would face tax penalties or federal action by failing to contribute enough.
"We urge you to begin that effort without allowing any more blows to be dealt to the traditional plans that have weathered so much in the past few years," Mr. Alam said.
The main stumbling block is Senate language that would allow the nation's 1,700 multiemployer plans to defer losses over the next two years. The administration objected, saying that would encourage underfunding of plans, and threatened to veto the bill unless that provision was eliminated.
Mr. Boehner said Republicans offered a compromise yesterday that would help multiemployer plans with the greatest financial need, which Republican aides said would be accessible to significantly fewer than 20 percent of all plans.
Rep. Robert E. Andrews, New Jersey Democrat, said that would help fewer than 10 percent of plans, and "that was not acceptable."
Mr. Kennedy attributed the deadlock to intransigence, arbitrary interference and "punitive, antilabor provisions" from the White House.
Multiemployer plans, which cover about 9 million of the 44 million workers covered by the PBGC, are usually operated jointly by labor and management in such fields as construction and trucking.
The General Accounting Office, the investigative wing of Congress, released a report yesterday that said multiemployer plans, after two decades of relative stability, "have suffered recent and significant funding losses" because of stock market declines and poor economic conditions. Multiemployer plans are now underfunded by $100 billion, up from $21 billion in 2000.
In addition to general accord on single-employer plans, the negotiators were close on the third part of the legislation; those would reduce for two years what airlines and steelmakers with underfunded pension plans must pay into a required catch-up fund.

Posted by maximpost at 12:19 AM EST
Saturday, 27 March 2004


Air Force let Boeing rewrite terms of tanker contract
Knight Ridder Newspapers
WASHINGTON - The Air Force gave the Boeing Co. five months to rewrite the official specifications for 100 aerial refueling tankers so that the company's 767 aircraft would win a $23.5 billion deal, according to e-mails and documents obtained by Knight Ridder.
In the process, Boeing eliminated 19 of the 26 capabilities the Air Force originally wanted, and the Air Force acquiesced in order to keep the price down.
The Air Force then gave Boeing competitor Airbus 12 days to bid on the project and awarded the contract to Boeing even though Airbus met more than 20 of the original 26 specifications and offered a price that was $10 billion less than Boeing's.
The Boeing tanker deal has been under investigation since it became public two and a half years ago and has been suspended pending the outcome of the probes.
But the e-mails and other documents show just how intent the Air Force was on steering the deal to Boeing, even though Airbus' tankers were more capable and cost less.
In one document, Bob Gower, Boeing's vice president for tankers, noted that one objective in rewriting the specifications was to "prevent an AoA from being conducted." "AoA" stands for "analysis of alternatives" or, in essence, a look at serious competitors.
Among the original Air Force requirements Boeing eliminated was that the new tanker be equipped to refuel all the military services' aircraft, refuel multiple aircraft simultaneously, and carry passengers, wounded troops and cargo. Boeing also eliminated an Air Force requirement that the new tankers be at least as effective and efficient as the 40-year-old KC-135 tankers they would replace.
Sen. John McCain, R-Ariz., demanded the Boeing documents in his role as chairman of the Senate Commerce Committee. Senate investigators made the Boeing documents available to Knight Ridder.
Air Force Undersecretary for Acquisitions Marvin Sambur defended the Boeing deal. "This was not a competitive bid process," he said. "The Air Force was ordered by Congress to work with Boeing on the new tanker program."
Sambur was referring to a line item inserted into the appropriations bill in 2001, after the Sept. 11 attacks, by Sen. Ted Stevens, R-Alaska, which said the Air Force should lease 100 767s from Boeing to be used as tankers.
The bill passed the Senate over the objections of McCain and other senators. After the bill became law, McCain, in a committee hearing where Air Force Secretary James Roche was testifying, criticized Roche for an uncompetitive deal, and Roche agreed to conduct a competitive bidding.
The Air Force then put out a request for information to Boeing and Airbus, but by then Boeing and the Air Force had made arrangements that ensured Boeing would win.
Sambur also confirmed that the first 100 Boeing planes would be able to refuel only one plane at a time and would be able to refuel only Air Force planes.
The Boeing deal provides for a refueling capability for Navy, Marine and Special Operations aircraft "in the second spiral of development," Sambur said. Retrofitting the first 100 planes to do so would be at additional cost to the Air Force, he said.
But Doug Kennett, a Boeing spokesman in Washington, said that the first 100 tankers would be able to refuel Navy, Marine and allied aircraft one at a time.
He also said the Air Force turned Airbus down on failure to meet several specifications. The Airbus aircraft was larger than what the Air Force wanted and at the time Airbus did not have the specific type of refueling boom required by the Air Force, Kennett said.
Other sources said Boeing would have to redesign the wings of the 767 to add the ability to refuel more than one plane at a time. That cost also would be additional to the Air Force.
Politics has played a heavy role in the Boeing deal. House Speaker Dennis Hastert, R-Ill., whose state is home to Boeing headquarters, and Democratic Rep. Norman D. Dicks, who represents the state of Washington, where a key Boeing production plant is located, lobbied the White House on the deal.
Boeing and the Air Force also lobbied for the deal, and President Bush designated his chief of staff, Andrew Card, as the point man on the issue.
The Office of Management and Budget and other independent agencies criticized the tanker deal as too expensive and unneeded.
Card intervened and ordered them to move ahead with the Boeing deal.
White House spokesman Claire Buchan said Card sought to mediate the contract dispute without taking sides.
"There were disagreements among the Air Force, the DOD (Department of Defense) and the OMB. His role was to ensure that all sides were heard, and that the military's needs were met, and that the taxpayers got the best value for their money," she said Saturday.
Boeing e-mails indicated that Card was primarily interested in how many jobs the contract would create: Boeing claimed upwards of 28,000, but Roche, the Air Force secretary, in a letter to the White House upped the ante to 39,000 new jobs.
"This was a negotiation between the Air Force and Boeing; they weren't giving it to Airbus," said Steven Schooner, co-director of the Government Procurement Law Program at George Washington University. "It definitely lends support to the generally accepted reflection that this was never intended to be an open competition.
"In a competitive procurement, you don't let one of the competitors write this because it gives them a competitive advantage," Schooner said.
Senate investigators have plowed through some 8,000 pages of Boeing documents that were so embarrassing and revealing that the company last year fired one of its vice presidents, Darleen Druyun. Druyun had been an Air Force acquisitions officer involved in negotiations on the tanker deal. Boeing also fired its chief financial officer, who had hired Druyun. Boeing chairman and chief executive Phil Condit also left the company in an attempt to help Boeing put the scandal behind it and get the deal back on track.
McCain - who's led a two-year fight against what he considers both a bad deal for the government and an unnecessary deal for the Air Force - pointed out in a letter to Department of Defense Inspector General Joseph Schmitz earlier this month that the Air Force in 2001 developed a draft Operational Requirements Document (ORD) with 26 specifications for the new tanker aircraft, then gave the document to Boeing.
The Air Force's minimum requirements were subsequently reduced to only seven - and Boeing tailored the specifications to the airplane the company had on hand. The first 100 planes can only be used to refuel Air Force fighters and bombers.
The rewritten document was so thoroughly tailored to Boeing's wish list that when it was briefed to the Pentagon's Joint Requirements Board in July 2002 it was actually titled the "KC-767 ORD."
A board member's memo on the briefing said the operational requirements documents "should not be written for a specific aircraft but rather for a capability" and directed the title to be changed so as not to identify a particular aircraft.
The Air Force changed the name, but not the specifications.
Schmitz is set to release his audit report within the next week. It's the first of several investigations of the Boeing deal, including one by federal prosecutors.
A draft of the audit report, leaked earlier this month to Bloomberg News, said the Boeing contract was flawed and may need to be renegotiated because of "unsound acquisition and procurement practices." But Schmitz could find "no compelling reason" to kill the deal.
His report also questions whether the government should be leasing any of the aircraft, because the cost of leasing a Boeing 767 tanker is greater than the cost of buying one at $138.5 million each. The deal, as presently structured, would have the government lease 20 of the tankers and buy 80.
Schmitz told Knight Ridder that the audit report, once proprietary and source information is removed, will be released to the public. He added that his office has initiated an investigation "into related matters." An investigation by the inspector general involves law enforcement, while an audit looks into fiscal practices.
The Schmitz audit report is certain to generate fresh outrage on Capitol Hill, resulting in new hearings and renewed demands for the Air Force to hand over its internal documents on the Boeing deal, which it has been refusing to do for nearly a year on what one Senate investigator called "very shaky grounds."
McCain, who also sits on the Senate Armed Services Committee, is pressing the committee to force the Air Force to hand over its internal documents as well.
Sambur said that the decision to withhold the internal documents "is taken at a much higher level than the Air Force. It is a very serious decision. If everyone knew that their e-mails were subject to this kind of scrutiny no one would use it to debate with their colleagues and develop positions. They would watch every word they write."
An Airbus spokesman told Knight Ridder that if the aerial tanker contract was re-bid, the Airbus group would not only underbid Boeing again, but it would also agree to build the aircraft in the United States.
A federal prosecutor in the Eastern District of Virginia has been investigating allegations that Druyun simultaneously conducted negotiations on the tanker deal for the Air Force while negotiating with Boeing for a job when she retired after 33 years with the Air Force.

(Knight Ridder correspondents Seth Borenstein and Ron Hutcheson contributed to this report.)

>> GENERICS 2...

Bush's AIDS Program Balks at Foreign Generics
U.S. Insistence on More Tests Complicates Rollout
By David Brown
Washington Post Staff Writer
Saturday, March 27, 2004; Page A03
The Bush administration is requiring that foreign-made generic AIDS drugs undergo further evaluation before they are used in its $15 billion global AIDS program, even though the same pills have passed muster by the World Health Organization and other international health groups.
Announced three weeks ago to the first organizations to get money through the Bush program, the decision is already complicating the rollout of the enormously ambitious President's Emergency Plan for AIDS Relief. That plan, which goes by the acronym PEPFAR, aims to put 2 million people in 14 African and Caribbean countries on life-saving antiretroviral therapy over the next five years.
The decision to spend U.S. funds only on brand-name drugs until foreign generics are studied further has angered AIDS activists. They see it as an effort to protect the U.S. pharmaceutical industry and undercut, at least symbolically, the burgeoning offshore generic drug industry.
"They are trying to hand the U.S. global AIDS plan over to Big Pharma," said Sharonann Lynch of the group Health GAP. "Look at the leg up that brand-name drugs are getting, courtesy of George Bush."
PEPFAR officials say they are only showing an abundance of caution as the United States government commences paying for lifelong medical treatment for millions of noncitizens, most of them in Africa.
"If in two or three years we have drug resistance as a result of a therapy that we introduce, we will have lost the continent in terms of our ability to treat," said Mark R. Dybul, an AIDS researcher from the National Institutes of Health now assigned to the Office of the U.S. Global AIDS Coordinator, at the State Department.
" 'Good drugs' isn't good enough. Because of the risk of resistance, we need the highest possible quality drugs to avert a disaster on the continent," he added.
Several experts believe the policy could have two possible effects.
It could delay initiating antiretroviral therapy in some AIDS patients in the developing world. Alternatively, it might require some of them to start taking more expensive brand-name pills and then switch to generic equivalents in six months to a year.
Even at the deep discounts offered by their makers, brand-name drugs in most cases are about three times the price of generics. And even if the period in which more expensive drugs are used is short, the policy could sow confusion in the minds of newly treated AIDS patients and complicate the operation of newly established AIDS clinics.
This is especially true in countries getting money not only from PEPFAR but also from sources such as the Global Fund for AIDS, Tuberculosis and Malaria, which endorses the pills that PEPFAR now prohibits.
"It is hard to simplify [an AIDS treatment system] when the Americans say: Let's do it with different drugs and a separate procurement system," Stephen Gloyd, a physician at the University of Washington, said. "It has a potential negative effect on the ground. It's not just an issue of buying more expensive drugs."
Through an organization called Health Alliance International, Gloyd is helping set up treatment programs in Mozambique with about $3 million from PEPFAR.
Practically speaking, the main drug that PEPFAR recipients will not be able to use immediately is a "fixed-dose combination" of three antiretroviral drugs -- stavudine, lamivudine and nevirapine -- made by several companies in India.
Sold as Triomune, Triviro and other names, it comes in a single pill and is taken twice a day. A year's supply can cost from $136 to $263. Taken as separate pills bought at a discount, this combination costs $559 a year.
The combination is one of four that World Health Organization experts recommend in the guidelines for the "3 by 5" program -- WHO's separate effort to help put 3 million people in poor countries on antiretrovirals by the end of 2005. In practice, about 90 percent of people who have never taken AIDS drugs are expected to start with it.
PEPFAR's prohibition against using this unusually handy pill arises from the requirement that AIDS drugs bought through the U.S. program must be "approved by a stringent regulatory authority or otherwise demonstrate quality, safety and efficacy at the lowest possible cost," according to guidelines issued in December. In practical terms, that means drugs approved by the Food and Drug Administration (FDA) -- this country's "stringent regulatory authority" -- or through other mechanisms the PEPFAR may set up.
Several years ago, WHO set up a system to help countries shop wisely for drugs used to treat the three big infections of poverty -- AIDS, tuberculosis and malaria. The system is called "prequalification."
Drug companies -- both those making patented brand-name drugs as well as those making unpatented generics -- are invited to submit their products for WHO evaluation. The drugs (or, in the case of combinations, their components) have been tested and licensed elsewhere. WHO examines them for purity, safety and efficacy. Employing three-person teams of regulatory experts, it also inspects the factories where they are made.
If the drug is deemed safe and potent, and the manufacturing procedures good, it is published on a list. Periodically, samples of these "prequalified" drugs are tested to make sure they are still up to standard, and are being made where they are supposed to be made.
The system is voluntary. Because it has no legal standing and is simply a service for WHO's 192 member states (especially ones that do not have an equivalent of the FDA), "prequalification" does not meet PEPFAR's legal requirements.
Generic drug manufacturers in India, Brazil and elsewhere could submit their products to the FDA for approval, but most do not because they would then have to honor U.S. patent law. Consequently, Triomune and similar products are not licensed for use in the United States.
Dybul said the data WHO collects may contain all the information PEPFAR needs to reassure itself that Indian generics are good enough. However, WHO collected the data with the understanding it would be confidential.
"All we are saying is: We need to see the data ourselves," Dybul said. He added that if anything bad happened because the Bush program used substandard drugs, "you would crucify us for not having the due diligence of looking at the data ourselves -- and rightly so."
However, because the data cannot be turned over to PEPFAR, U.S. officials are proposing that countries and organizations agree on a set of principles by which fixed-dose combination drugs -- not only for AIDS but also for other diseases -- can be evaluated. Each group could adopt the principles as its own, and drug companies would know what documentation to submit.
A meeting to work on a statement of principles is scheduled to take place Monday and Tuesday in Gaborone, Botswana. Even if adopted quickly, it could be fall before offshore AIDS generics get PEPFAR's approval under this mechanism.
Many experts do not think such a parallel system is necessary, given the existence of WHO's prequalification program.
"We are basically doing all the same functions" that the FDA does when it reviews generic combinations composed of medications that have long been taken together as separate pills, said Lembit Rago, WHO's coordinator for quality assurance and safety of medicines.
A clinical pharmacologist who once headed Estonia's counterpart to the FDA, Rago said in practical terms it is irrelevant that "prequalification" is not "legal licensure."
"It doesn't matter which color is the cat. It has to catch the mice," he said.
? 2004 The Washington Post Company

Rapid Oral Test for HIV Approved
Saturday, March 27, 2004; Page A03
The Food and Drug Administration has approved the first rapid saliva test for the virus that causes AIDS, officials said yesterday.
The test, made by OraSure Technologies Inc., provides results within 20 minutes with 99 percent accuracy. Other approved rapid tests for the human immunodeficiency virus require taking blood samples.
"This oral test provides another important option for people who might be afraid of a blood test," said Health and Human Services Secretary Tommy G. Thompson.
Officials also said the test could help on two fronts, encouraging more people to get tested as well as actually getting them the results.
One-fourth of the roughly 900,000 HIV-infected people in the United States are not aware they have the virus, the Centers for Disease Control and Prevention estimates.
People given standard tests that take a week or two often do not return to get the results. With a rapid test, a patient can get an answer in just one clinic visit. Those who test positive can start treatment quickly and take steps to keep from spreading the virus.
The new test also helps protect health care workers from becoming infected with HIV because they do not have to handle blood, officials said.
Results should be confirmed by a second, more specific test, the FDA said.

Plan to Fight AIDS Overseas Is Foundering
Three years after the United Nations declared a worldwide offensive against AIDS and 14 months after President Bush promised $15 billion for AIDS treatment in poor countries, shortages of money and battles over patents have kept antiretroviral drugs from reaching more than 90 percent of the poor people who need them.
Progress in distributing the drugs, which have sharply cut the death rate in the United States and other Western countries, has been excruciatingly slow despite steep drops in their prices.
As a result, only about 300,000 people in the world's poorest nations are getting the drugs, of six million who need them, according to the World Health Organization.
Experts, advocacy groups and health officials agree that the delays, compounded by inadequate medical facilities and training in very poor countries, are likely to persist unless spending is stepped up sharply.
Early this month, Stephen Lewis, the special United Nations envoy for AIDS in Africa, conceded that the W.H.O.'s ambitious plan to have three million people in treatment by 2005 -- announced on Dec. 1, World AIDS Day -- was already collapsing from a lack of money. Donations to the Global Fund to Fight AIDS, Tuberculosis and Malaria are now about $1.6 billion a year, barely 20 percent of what Secretary General Kofi Annan said was needed when he created the fund in 2001.
Saying that global contributions come to a tiny fraction of what is being spent on military operations and building civilian institutions in Iraq and Afghanistan, Mr. Lewis added that if the W.H.O. program failed, "there are no excuses left, no rationalizations to hide behind, no murky slanders to justify indifference -- there will only be the mass graves of the betrayed."
While Mr. Bush promised in his 2003 State of the Union address to spend $15 billion over five years on AIDS in Africa and the Caribbean, his budget requests have fallen far short of that goal. For the most recent donation to the Global Fund, he requested only $200 million, although Congress authorized $550 million.
Nor have Europe and Asia been as generous as the fund had hoped.
Dr. Richard G. A. Feachem, a Briton who is the fund's executive director, put a brave face on the situation, describing current donations as "a steep upward flight path to our cruising altitude, which we anticipate to be $8 billion." To get there in the fund's first two years would be "inconceivable," he added. He is lobbying Congress for $1.2 billion for 2005.
At the same time, few people in poor countries have been able to get lower-priced generic antiretroviral drugs. While the generic drugs have been approved by the W.H.O., endorsed by the World Bank and used in several African countries, the Bush administration has so far paid only for medicines that are still under patent and cost much more.
For example, Daniel Berman, co-director of the Doctors Without Borders campaign for low-cost drugs, said that in Zimbabwe his organization planned to treat 1,000 patients with drugs from two approved Indian generic makers, Cipla Ltd. and Ranbaxy Laboratories Ltd.
Both companies combine three antiretrovirals so that a day's dose is just two pills and the cost is $244 to $292 per patient per year. Meanwhile, Mr. Berman said, the Centers for Disease Control in Atlanta plans to pay for the treatment of 1,000 Zimbabweans, buying the same three drugs separately from GlaxoSmithKline, Bristol-Myers Squibb and Boehringer-Ingelheim. The best prices available in Africa from those companies, he said, add up to $562 a year, and a daily dose is six pills.
Advocates of cheap drugs say the Bush administration has yielded to pressure from the pharmaceutical lobby to find ways to reject the generics.
On Friday, Senators Edward M. Kennedy, Democrat of Massachusetts, and John McCain, Republican of Arizona, wrote a joint letter to the White House urging it to accept W.H.O.-approved generics.
In a separate letter, Representative Henry A. Waxman, Democrat of California, accused the administration of trying to set standards for Indian generics higher than those for American ones.
A spokesman for Randall L. Tobias, the administration's AIDS coordinator, said any suggestion that he was snubbing generics was "utter nonsense."
"We will buy whatever drug is safe and effective at the lowest possible price," said the spokesman, Dr. Mark R. Dybul. "We don't care if it's made by Cipla or Ranbaxy, in South Africa or Brazil or Nigeria."
Mr. Tobias has scheduled a meeting in Botswana for Monday to ascertain whether the W.H.O.'s approval process is rigorous enough.
Dr. Lembit Rago, who leads the W.H.O. assessments, said he used "absolutely the same principles" as the Food and Drug Administration, and borrowed his inspectors from regulatory agencies in Canada, France, Germany, Sweden and Switzerland. As soon as his office approved the Indian pills, he said, "a very cold wind began to blow from the U.S."
"It is no secret that Pharma is lobbying against us in a big way," he said.
A spokesman for the Pharmaceutical Research and Manufacturers Association of America, the industry's American lobbying group, said his association was "not involved in any way in this." But he called the Indian drugs "new combinations that have not been appropriately treated."
Dr. Dybul said Mr. Tobias wanted to see all the data the Indian companies gave the W.H.O.
A W.H.O. spokeswoman said the agency signed confidentiality agreements, but she said the Bush administration could ask the Indian companies for the data.
Against that backdrop, prices for both branded and generic medicines have plunged in the last two years. Last October, a foundation organized by former President Bill Clinton announced an agreement with Indian and South African generic makers to sell the drugs for $140 per patient per year if large orders were guaranteed, payment was in cash and the drug maker did not have to pay the legal and lobbying costs of getting each drug licensed in each country.
In January, Mr. Clinton announced that he had brokered another price-cut deal with five companies making AIDS tests. One of the companies, Becton, Dickinson & Company, dropped the cost of its CD-4 count, which measures immune cells, to as little as $3, from a high of $10.
On Dec. 9, with little fanfare, an important step took place in South Africa. Two pharmaceutical giants, Glaxo and Boehringer-Ingelheim, agreed to grant licenses to produce AIDS drugs to four generic companies from India and South Africa.
The companies will be allowed to sell the drugs anywhere in sub-Saharan Africa. In return, Glaxo and Boehringer will get royalties of 5 percent of sales. Under the threat of heavy fines, the companies had backed down from their original plan: a license for one small generic maker supplying only South Africa's public hospitals and royalties of 15 percent to 30 percent.
The Canadian government has proposed a law encouraging its drug makers to make cheap copies of drugs to treat AIDS and malaria for export to poor countries. The bill is bogged down in Parliament.
Treatment plans have varied wildly in different countries. South Africa, with the world's largest number of AIDS patients, was slow to roll out nationwide treatment because of years of opposition by President Thabo Mbeki. India, which has the second largest number, has been slow to negotiate low prices with its own generic companies. Brazil makes its own generic drugs. Romania buys only brand-name drugs, but its epidemic is confined to about 10,000 people.
Nigeria, Africa's most populous country, has had trouble running even so much as a pilot program for 15,000 of an estimated 3.5 million infected people. Many of the country's 25 treatment centers, which were selling the drugs at a subsidized price of $85 a year, ran dry in September and did not get new supplies until February.
Malaysia is the only country to exercise a "compulsory license" right under trade treaties to ignore a patent and import generics, said James P. Love, director of the Consumer Project on Technology, a group that is pushing for cheaper drugs. Uganda, Mozambique and Zambia may soon do the same, he said, but China backed away from doing so for fear of American trade retaliation. "They're using older drugs that are already off patent in China," he said.
Copyright 2004 The New York Times Company

Imam Not Allowed To Attend Va. Meeting
By Timothy Dwyer and Jerry Markon
Washington Post Staff Writers
Saturday, March 27, 2004; Page A11
A federal judge yesterday rejected a Cleveland imam's request to travel to Northern Virginia for what prosecutors said was a meeting with a group with ties to terrorists.
The imam, Fawaz Damra, faces federal charges in Ohio that he lied on his citizenship forms by concealing his affiliation with several terrorist groups, including Palestinian Islamic Jihad. He had asked a judge earlier this week for permission to travel to Springfield for a meeting last night sponsored by the United Association for Studies and Research Inc., or UASR.
The group says it is a Muslim American think tank, but federal prosecutors and congressional investigators have linked it to terrorist groups, primarily the Islamic Resistance Movement, or Hamas, court records and interviews show. Hamas has been designated a terrorist organization by the U.S. government.
Anisa Abd el Fattah, director of public affairs for UASR, said the organization is not tied to Hamas or any other terrorist group. She said last night's meeting at the UASR offices was the first in a series that would lead to "a structure for what we hope is going to be Muslim-Jewish dialogue between Muslim and Jewish leaders in the United States."
Local Muslim leaders and imams were planning to attend last night's meeting, she said. Future meetings, she added, would include Jewish community leaders.
In documents filed this week in U.S. District Court in Cleveland, Damra's attorneys described the meeting as "a panel discussion between Rabbis and Imams at an Interfaith meeting." Damra is required under terms of his bail to request permission to travel.
Damra, the imam of the Islamic Center of Cleveland, also known as the "grand mosque," was indicted by a federal grand jury in December on one count of naturalization fraud. A trial date has not been set.
Prosecutors allege that Damra did not disclose his ties to Islamic Jihad, which has claimed responsibility for bombings and other terrorist acts in Israel. Law enforcement sources said Damra was formerly the head of al-Farooq mosque in Brooklyn, N.Y., whose adherents include men convicted in the first bombing of the World Trade Center in 1993 and Omar Abdel Rahman, the "blind sheik" who was convicted along with nine others in a plot to blow up Manhattan landmarks including the United Nations.
An attorney for Damra, who has pleaded not guilty, did not return telephone calls yesterday.
In response to Damra's travel request, Gregory A. White, the U.S. attorney in Cleveland, filed a memo saying he "strongly opposes" granting it because UASR "has demonstrated its sympathies for Hamas." He added that several "key associates" of the Springfield group "are, or have been, integrally involved in Hamas activities."
Among those, prosecutors said, is Mousa Abu Marzook, a Hamas leader and Gaza native who lived in Northern Virginia until 1993 and was designated a terrorist by the U.S. government in 1995.
El Fattah said Marzook founded UASR but did not begin his affiliation with Hamas until five years later and has not been involved with UASR since at least 1996. She added that Marzook's wife and children still attend UASR's functions.
Another former UASR official is Abdurahman Alamoudi, a prominent Muslim activist indicted in federal court in Alexandria in October on money laundering and fraud charges. Among the charges is that Alamoudi lied on his citizenship forms by not revealing his role as a "director" of UASR.
After the judge rejected Damra's request to travel to Springfield, his attorneys filed another motion saying he was "unaware of any of the facts" alleged by prosecutors.
UASR is also one of the dozens of Muslim charities and foundations for which Senate Finance Committee investigators are seeking tax and financial records. The records were requested as part of a widening probe into alleged ties between tax-exempt organizations and terrorist groups, according to documents and federal officials.


IDs easily bought in Venezuela could aid terrorists, U.S. fears
U.S. officials worry that Venezuela's trade in fake identification documents could help terrorists and other criminals hide their identities.
CARACAS - Juli?n runs a small office supply shop in downtown Caracas, but his main income comes from the dilapidated government immigration offices nearby.
Juli?n readily admits that he moonlights as a purveyor of fraudulent Venezuelan passports and national identity cards, and an expediter of real ones.
And he gladly ticks off the prices he offers, usually to illegal immigrants: about $260 for a fake passport and $80 for a fake national identity card known as a cedula. It's a lot more for real ones, depending on how fast his clients want them.
In the post-Sept. 11 era, Venezuela's trade in false documents has alarmed U.S. officials, in light of allegations that leftist President Hugo Ch?vez's government has issued fake IDs to leftist guerrillas in neighboring Colombia, Arabs with suspicious backgrounds and Cuban intelligence agents.
The trade is indeed widespread and at times worrisome, a month-long Herald review of the allegations found.
Two Venezuelan Muslims -- one who attended two of the same U.S. aviation schools as one of the Sept. 11 hijackers, another arrested with a grenade in London -- may have false documents, the former head of Venezuelan immigration told The Herald.
But the trade has been going on for decades, mainly linked to corrupt employees in the immigration department, known by its Spanish acronym DIEX, and apparently has not increased significantly under Ch?vez, The Herald also found. Ch?vez has denied the allegations.
''I've been doing this long before Ch?vez became president,'' said Juli?n, who asked that his last name not be published. ``It's a traditional, historic practice in our country.
U.S. officials said their main fear is that Islamic radicals, hiding their true identities with Venezuelan documents, could slip into the United States, past terrorist ''watch lists,'' and stage another Sept. 11-style attack.
''The sale of cedulas and passports . . . did not start with Ch?vez. But we are more concerned now because terrorists can exploit a corrupt system to hurt us,'' said a top U.S. government official familiar with Venezuela.
Washington already has taken action. In recent months, the U.S. Consulate in Caracas has denied visas to Venezuelans carrying flimsy ''temporary'' passports or regular passports that were renewed multiple times after the initial expiration date of five years.
Stuart Patt, a State Department spokesman, said the single-sheet temporary passports were issued by the Venezuelan government in the last few months after it ran out of the more secure regular passports.
''In general,'' Patt said, ``Venezuelan passports are not very reliable documents. They are susceptible to fraudulent use.''
Colombian officials, who have long alleged that Ch?vez is helping the guerrillas, say that scores of the rebels killed or captured near the eastern border with Venezuela were carrying Venezuelan cedulas.
''We know they can buy them easily there,'' one army general in Bogot? said recently. ``They can buy them easily here, too, by God. We Colombians are famous around the world for making false documents.''
''But there's so many of them these days that we have to ask: Is it a business or is it a policy?'' the general added.
The cedula is the primary national identification document in Venezuela, serving as proof of birth for Venezuelans and residency for foreigners.
But retired national guard Gen. Marco Antonio Ferreira, who resigned as head of DIEX in April 2002, said that some of the agency's branch offices outside Caracas long have issued cedulas to illegal migrants in exchange for bribes.
He gave The Herald a computerized list of more than 3,000 names of people holding what he suspects are real but fraudulently obtained documents.
They carry the numbers for blank cedulas that were sent to provincial branches but then ordered withdrawn for a number of reasons, chief among them that the branches had a surplus of blank forms, Ferreira said.
Ferreira's lists of suspect cedulas included more than 300 people with Middle Eastern names. A U.S. Homeland Security Department official checked the names against a terrorist watch list and found no matches.
But Ferreira said he suspected that the Venezuelan ID cards carried by Hakim Mohamed Ali Diab Fattah and Hazil Muhammad Rahaman Alan were false. Venezuelans are required to obtain cedulas at age 7. Ferreira said the two Muslims obtained theirs when they were 19 and 24.
Diab Fattah, 30, was detained in the United States after taking lessons at two of the same aviation schools attended by Sept. 11 hijacker Hani Hanjour. He was deported to Venezuela in 2002. Rahaman, 38, was arrested in London last year after a hand grenade was found in his luggage at Gatwick airport. He is awaiting trial there.
Concerns over Venezuela's ID system deepened in January when the Ch?vez government implemented a new immigration initiative: ''express'' residency and naturalization for foreign nationals living illegally in Venezuela.
Opposition leaders said the system will compromise the nation's security and that Ch?vez is only trying to increase the number of voters who may support him if electoral officials approve the recall referendum against Ch?vez sought by his political opponents.
But Venezuelan immigration officials argue that legalizing longtime illegals strengthens national security -- the same argument President Bush used recently when he proposed granting temporary work permits to illegal immigrants.
''Regularization is a policy which will not only resolve the situation of illegal foreigners but will also seek to safeguard the security of the state,'' Hugo Cab?zas, current head of DIEX, was quoted as saying recently by the Caracas daily El Universal.
Thousands of illegal migrants signing up for the express program -- most of them Colombians who fled here when their country was awash in political bloodshed and Venezuela's oil-fueled economy was humming along -- now mob the DIEX building almost daily.
And for those not willing to stand in line, there are still many fake-ID dealers nearby like Juli?n, known here as gestores, Spanish for brokers or middlemen.
``Many of the businesses around the DIEX have gestores. Here, I photocopy documents, and others plastify the cedulas. But thats just part of what we really do. Many people around here survive on selling cedulas and passports.

A pair of arrests illustrates problem
CARACAS - The cases of two Venezuelan Muslims arrested in the United States and London illustrate the unreliability of the country's national identification card system.
If they were not who their documents said they were, who were they?
* Hakim Mohamed Ali Diab Fattah. Carries Venezuelan National ID card No. v16.105.824, issued in 1993, identifying him as a Venezuelan citizen.
Detained in the United States in 2001 after he was found to have attended two of the same aviation schools as Sept. 11 hijacker Hani Hanjour.
Deported to Venezuela March 8, 2002, four days after the U.S. Embassy in Caracas sent a letter to the Venezuelan government saying he had violated U.S. immigration laws and that an FBI investigation had shown he had ``threatened that he was going to blow up an Israeli airliner.''
U.S. officials familiar with the case said they were confident that U.S. investigators thoroughly checked his background and found him not to be a threat.
His identification card, issued in the Caribbean town of Maiquetia, shows he would be 30 years old now. He is believed to be of Palestinian descent.
But former Venezuelan immigration department chief Marco Antonio Ferreira said he suspected the ID was fraudulently obtained because Diab was 19 when it was issued. Venezuelans usually obtain ID cards at age 7 to register for school.
His whereabouts are unknown.
A family member told The Herald that other relatives had taken Diab to Israel. An Israeli official said Diab had not sought a visa at the Israeli Embassy in Caracas.
* Hazil Muhammad Rahaman Alan. Carries ID card No. v6.285.604, issued in 1990.
Arrested in London last year after a hand grenade was found in his luggage at Gatwick airport, he is awaiting trial there. Media reports say he visited Afghanistan and Sudan, two former Al Qaeda strongholds.
Rahaman obtained his ID card at age 24. Ferreira said he has more suspicions about him because the records backing up his ID card application ``appear to have been extracted from the files.''
Rahaman is believed to be of Southeast Asian descent, and his family has a home in the well-to-do Caracas district of El Cafetal. The home is now empty.
A neighbor told The Herald that Rahaman's mother had told him shortly after the arrest in London that her son had disappeared eight or nine years ago and not been heard from.

Uribe sees Bush, hopes aid follows
WASHINGTON - President Alvaro Uribe of Colombia ended a four-day visit Thursday with an upbeat assessment of his country's progress against drugs, guerrillas and economic woes.
After his third meeting with President Bush in two years, Uribe said he is grateful for $2.5 billion in U.S. aid since since 2000, adding that the so-called Plan Colombia is helping to improve security and reduce coca cultivation.
Aggressive eradication efforts have reduced coca cultivation by 33 percent in the last two years, according to a State Department report released during Uribe's visit.
''These are credible numbers, but we are not bragging,'' Uribe told an audience at the National Press Club. ``These are just the first results, and I am not satisfied.''
Colombian officials said they also have high hopes for free-trade talks with the United States, scheduled to begin in May.
And this week Gen. James Hill, chief of the Miami-based U.S. Southern Command, asked Congress to raise the limit on the U.S. presence in Colombia to 800 military personnel and 600 civilian contractors. The current cap is 400 of each.
With recent Colombian advances against guerrilla groups, Hill said he saw a chance, with increased training and support, to ``deal a decisive blow against narco-terrorists.''
Uribe said that improved security was his top concern and essential to luring investment and improving democratic institutions. He quoted the former Socialist leader of Spain, Felipe Gonzalez, who once told him, ``Security is a democratic value.''
Asked about support for the U.S. war in Iraq, Uribe ducked the question. But he said the war is part of a larger global conflict with terrorism.
He faced critical questions on Capitol Hill about his efforts to make peace with several hundred members of the United Self-Defense Forces of Colombia, or AUC, an illegal paramilitary group widely accused of brutality in fighting leftist guerrillas.
Several House members said the agreement could protect human rights abusers, but Uribe said he was trying to reintegrate the AUC fighters into society.

Posted by maximpost at 11:31 PM EST

A Guide to the New 2004 Social Security Trustees' Report
by David C. John
WebMemo #459

March 25, 2004
On March 23, 2004, the latest annual report of the Social Security's Trustees was released to the public. Most stories about this report focused on obvious facts such as when the trust fund will run out. However, there is much more to the story than just those dates. This briefing gives you an idea of how to get to the important facts behind the obvious in order to get a real picture of Social Security's financial outlook.
What is the Trustees' Report?
Every year, the Social Security Act requires the Trustees of the Social Security trust funds to issue a report on the financial status of those trust funds. This report includes not only current financial information, but also projections about the funds' ability to finance promised benefit payments in the future. If the report shows that the trust funds will be unable to finance all of these payments (as all recent reports have), the law requires the Trustees to recommend ways to make up the shortage. However, this requirement is regularly ignored.
The Trustees include the Secretaries of Treasury, Labor, and HHS, the Social Security Administration Commissioner and Deputy Commissioner, and two public trustees appointed by the President and confirmed by the Senate. The public trustees are Thomas R. Saving of Texas A & M University and John L. Palmer of Syracuse University. They were nominated to a five-year term by former President Bill Clinton in 2000 and were approved by the Senate later that year.
The 2004 Report is the third to include the full input of these public trustees and continues to include a great deal of additional information that was not available in previous reports. Both trustees have spoken about the need to include more and clearer information so that the public can fully understand the state of the Social Security trust fund and the financial challenges that lie ahead. This year's Report again shows the results of their efforts.
What does it all mean?
Good news for seniors. The benefits of current retirees and those close to retirement are completely safe. The 2004 Report shows that the program will have enough resources to pay full benefits until 2018. Despite political scare tactics, seniors can rest assured that their benefits are safe.
Bad news for younger workers. Unfortunately, younger workers have a great deal to worry about. Even though their parents' and grandparents' benefits are safe, theirs are not. Any worker born after 1975 will reach full retirement age after the trust fund is exhausted. Unless Congress acts soon, they can look forward to paying full Social Security taxes throughout their careers but only receiving 73 percent or less of the benefits that have been promised to them. In addition, they will have to pay about $5 trillion (in today's dollars) in additional general taxes in order to repay the Social Security trust fund.
Social Security must be reformed. The Report shows that today's Social Security cannot last. Over time, the system has promised almost $26 trillion (in 2004 dollars) more in benefits than it will have the ability to pay. Just repaying the amount that will be in Social Security's trust fund will cost over $5 trillion.
Delay makes it even harder to reform Social Security. Every year, there is one less year of surplus and one more year of deficit. Once those deficits start in 2018, the Trustees' Report shows that they will never end. Each year, with the disappearance of another year of surplus, reforming Social Security gets more expensive.
Delay will make it harder to run the rest of the government. If Social Security is not reformed, by 2030 it will require almost 13 percent of all income taxes collected that year in addition to what the program would receive from its payroll taxes to pay all promised benefits. By 2040, that number will surpass 15 percent of all income taxes and it will continue to grow after that. This will make it much harder for our children and grandchildren to pay for government programs dealing with national security, health, education, and the environment.
Personal retirement accounts must be established. Allowing American workers to invest a portion of their existing Social Security taxes in an account that they would own is the lowest cost way to ensure that they have an adequate retirement income. The alternative is a combination of benefit cuts and tax increases. Without personal retirement accounts, workers will end up paying more taxes for less benefits. Polls consistently show that a large majority of Americans support President Bush's plan to establish such accounts.
False lessons that should be avoided
President Bush's tax plan makes Social Security worse. Cutting taxes will not make it harder to pay for Social Security's coming deficits. Social Security will take in more cash than it pays out for about fourteen years. Without the growth that will be stimulated by the President's tax plan, future Congresses will face a much harder task in either reforming Social Security or paying for its deficits.[1]
Repealing President Bush's tax cuts will make it easier to pay for Social Security. Repealing tax cuts today will not make it easier to pay for Social Security in the future. Social Security does not need any additional cash to pay benefits for about another fourteen years. During the interim, Congress will just spend the additional money on new programs, and by the time it might be used to pay benefits, every dollar will be committed to new "essential" programs that cannot be cut.
Social Security's problems are so far in the future that we don't need to worry about them. It takes about 22 years to grow a taxpayer. Almost every new taxpayer who will begin a new career after graduating from college in 2025 is living today and can be counted. Similarly, everyone who will receive Social Security retirement benefits in the year 2040 is alive and most of them are paying taxes. Social Security's problems are based on demographics, which don't change from year to year. The people who will be hurt if nothing is done to fix Social Security are not fantasy people of the future. They are our children and grandchildren of today.
What is easy to find in the Report
When Social Security will begin to run a cash-flow deficit. The most recent estimates on when the trust fund will begin to spend more money in benefits than it receives in taxes is usually found in the accompanying press release and in the front of the Trustees' Report. It also includes the latest estimate of when the trust fund will be exhausted. According to the new 2004 Report, the year that Social Security will begin to spend more in benefits than it receives in payroll taxes remains at 2018 - the same year that was in last year's Report. The year the "trust fund" is exhausted also stays the same at 2042.
Operating numbers from the current year: The Trustee's Report includes detailed information about the aggregate amount of payroll taxes paid in the just ended calendar year and the aggregate amount of benefits of different types paid in that year. It also includes data on operating expenses. In 2003, the Old-Age and Survivors Trust Fund (which pays for retirement and survivor's benefits) took in $543.8 billion and paid out $406.0 billion. The annual surplus was $137.8 billion.
Dozens of charts and tables: Literally dozens of various technically labeled charts and tables are scattered through the Trustees' Report. Unfortunately, their actual meaning is usually much less clear.
What you will have to search for
The Meaning of All Those Charts. So far, the Trustees have used three scenarios to project Social Security's financial future. The middle scenario, which is the most likely to occur, is usually cited. The Trustees have also included both a more optimistic projection and a more pessimistic projection. Although all three are listed, it is not correct to assume that there is an equal chance that each might occur. It would be far more correct if the Trustees also included the likelihood that each would occur.
However, hidden in the details of those charts is some critical information:
Social Security spending will exceed projected tax collections in 2018. These deficits will quickly balloon to alarming proportions. After adjusting for inflation, annual deficits will exceed $100 billion within about five years, $200 billion after about ten years, and $300 billion after about fifteen years.
Between 2018 and 2079, the cumulative unfunded liability (the amount more that Social Security will have to pay in benefits during that period than it will receive in payroll and other taxes) is projected to be about $25.85 trillion (in 2004 dollars). This is more than six times the national debt.
In net present value terms, Social Security owes $5.2 trillion dollars more in benefits than it will receive in taxes. That number includes $1.5 trillion, in net present value terms, to repay the bonds in Social Security's trust fund. This is an almost 6 percent increase from last year.
Net present value measures the amount of money that would have to be invested today in order to have enough money on hand to pay deficits in the future. In other words, Congress would have to invest $5.2 trillion today in order to have enough money to pay all of Social Security's promised benefits between 2018 and 2079. This money would be in addition to what Social Security receives during those years from its payroll taxes.
A new perpetual projection that extends beyond the usual 75-year planning horizon. In net present value terms, the perpetual projection is $11.9 trillion, including money necessary to repay bonds in the trust fund. Those projections show that Social Security's total deficit continues to grow well beyond the 75-year projection period. Any reform that just eliminates deficits over the 75-year window will not be sufficient to solve the program's problems. The current system would run into renewed deficits after the 75-year window ends.
This is important because many opponents of reform claim that raising payroll taxes by about 2 percent, the average percentage difference between revenues and outlays over the 75-year period, would solve Social Security's problems. The reality, however, is that the program's future deficits are projected to be so large that this tax increase would still leave a huge shortfall. These new projections should end the claims that Social Security's impending financial crisis can be resolved with modest changes to the current system.
What needs to be in the Report, but has not appeared so far
Specific information on the program's total long-term outlook. The Report should specify the long-term unfunded liability of Social Security in nominal and inflation-adjusted dollars, as well as any changes in the unfunded liability from year to year, using the SSA's own data. This year's Report offers improved information, but there is still a long way to go. With this information, working Americans could balance any short-term "improvements" in Social Security's financial future with the higher deficits their children and grandchildren will have to pay.
A measure of workers' rate of return. The Trustees' Report does not include any measure of what workers actually receive for their payroll taxes. The best way to accomplish this would be to include a chart in the Report that plots implicit rates of return by birth year. Similar to a chart found in the GAO's August 1999 report on Social Security's rate of return, this chart would illustrate to Americans that the rate of return from Social Security has steadily and dramatically decreased. For instance, GAO's chart shows that a worker born around 1920 could expect a rate of return from Social Security taxes of about 7 percent after inflation. On the other hand, a worker born in mid-1980s could only expect a return of under 2 percent. If they were provided with these figures, workers would see that, unless the current system is reformed, they can expect a lower rate of return on their taxes than their parents and grandparents received. More important, they can see that their children and grandchildren will receive even less from Social Security.
Information on the nature of its trust funds and how they differ from private-sector trust funds. The Office of Management and Budget explained in its fiscal year 2000 budget document that the Social Security "trust funds" do not contain stocks, bonds, or other assets that could be sold directly for cash. Unlike private-sector trust funds, the Social Security trust funds contain only IOUs that will have to be paid back with future taxes. As OMB noted,
These balances are available to finance future benefit payments...only in a bookkeeping sense. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits, or other expenditures.
Information used to make projections, including economic models and the relevant data analyzed. Social Security's trustees also should clearly disclose any changes made in these models during the previous year. This disclosure would allow independent researchers to verify the SSA's projections.
How does Social Security operate?
For a briefing on how Social Security operates, how the trust fund works, how benefits are calculated, and other features of the current system and reform options, please see Social Security Basics.

[1] For a further discussion, please see President Bush's Tax Plan Would Improve the Ability to Deal with Future Social Security Deficits.

David C. John is Research Fellow in Social Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
? 1995 - 2004 The Heritage Foundation
All Rights Reserved.

Providing Social Security Benefits in the Future: A Review of the Social Security System and Plans to Reform It
by David C. John
Backgrounder #1735
March 25, 2004 | Executive Summary | |
Social Security is the best-loved American government program, but how it works and is financed is almost completely unknown. Most Americans have a vague idea that they pay taxes for their benefits and that their benefits are linked somehow to their earnings. Many also know that the program is in trouble and needs to be "fixed" sometime soon to deal with the retirement of the baby boomers. Beyond this, their knowledge of the facts is severely limited and often colored by rumors and stories.
Most politicians exploit this lack of knowledge and limit their statements on Social Security to platitudes and vague promises. To make matters worse, reformers tend either to be content with similar platitudes or to speak in such detail that few outside the policy world can understand what they are saying. The simple fact is that today's Social Security is extremely complex, and any reform plan that is more than fine words will be similarly complex.
This paper attempts to simplify the reform debate by comparing various plans (including the current system) side by side. Each of the six sections of this paper compares how the current system and the reform plans handle a specific subject. Only reform plans that have been scored by Social Security's Office of the Chief Actuary are included in this comparison, using numbers contained in the 2003 Report of the Social Security Trustees. The six corresponding tables contain general reviews of aspects of the current system and the reform plans, with more details in the footnotes.
While looking at just one or two sections of special interest may be tempting, this approach would probably be misleading. For the best effect, each section should be considered together with the other sections in order to form a complete picture of the plan. Using simply one section by itself to judge an entire plan will not yield an accurate result.
Seven Important Rules for Real Social Security Reform
Information in this side-by-side comparison is based on Social Security's scoring memos for each plan and conclusions that can be drawn from information contained in those memos. While there are many good points in the reform plans examined in this analysis, this is not an endorsement of any proposal by the author or The Heritage Foundation. Instead, this comparison provides details of specific plans. However, it would be wise for reformers to follow a set of general principles to ensure that any Social Security reform both resolves Social Security's problems and provides workers with greater retirement security. Those principles are listed below.
This comparison of plans makes no effort to examine whether the Social Security reform plans included in it meet or violate any or all of the principles.
Principles for Social Security Reform:
The benefits of current retirees and those close to retirement must not be reduced. The government has a moral contract with those who currently receive Social Security retirement benefits, as well as with those who are so close to retirement, that they have no other options for building a retirement nest egg. If the benefits of younger workers cannot be maintained given the need to curb the burgeoning cost of the program, then they should have the opportunity to make up the difference by investing a portion of their Social Security taxes in a personal retirement account.
The rate of return on a worker's Social Security taxes must be improved. Today's workers receive very poor returns on their Social Security payroll taxes. As a general rule, the younger a worker is or the lower his or her income, the lower his or her rate of return will be. Reform must provide a better retirement income to future retirees without increasing Social Security taxes. The best way to do this is to allow workers to divert a portion of their existing Social Security taxes into a personal retirement account that can earn significantly more than Social Security can pay.
Americans must be able to use Social Security to build a nest egg for the future . A well-designed retirement system includes three elements: regular monthly retirement income, dependent's insurance, and the ability to save for retirement. Today's Social Security system provides a stable level of retirement income and does provide benefits for dependents. But it does not allow workers to accumulate cash savings to fulfill their own retirement goals or to pass on to their heirs. Workers should be able to use Social Security to build a cash nest egg that can be used to increase their retirement income or to build a better economic future for their families. The best way to do this is to establish, within the framework of Social Security, a system of personal retirement accounts.
Personal retirement accounts must guarantee an adequate minimum income . Seniors must be able to count on a reasonable and predictable minimum level of monthly income, regardless of what happens in the investment markets.
Workers should be allowed to fund their Social Security personal retirement accounts by allocating some of their existing payroll tax dollars to them. Workers should not be required to pay twice for their benefits--once through existing payroll taxes and again through additional income taxes or contributions used to fund a personal retirement account. Moreover, many working Americans can save little after paying existing payroll taxes and so cannot be expected to make additional contributions to a personal account. Thus Congress should allow Americans to divert a portion of the taxes that they currently pay for Social Security retirement benefits into personal retirement accounts.
For currently employed workers, participation in the new accounts must be voluntary. No one should be forced into a system of personal retirement accounts. Instead, currently employed workers must be allowed to choose between today's Social Security and one that offers personal retirement accounts.
Any Social Security reform plan must be realistic, cost-effective and reduce the unfunded liabilities of the current system. True Social Security reform will provide an improved total retirement benefit. But it should also reduce Social Security's huge unfunded liabilities by a greater level than the "transition" cost needed to finance benefits for retirees during the reform. Like paying points to obtain a better mortgage, Social Security reform should lead to a net reduction in liabilities.
The Social Security System and Plans
for Reform
The Current System
Social Security currently pays an inflation-indexed monthly retirement and survivors' benefit, based on a worker's highest 35 years of earnings. Past earnings are indexed for average wage growth in the economy before calculating the benefit. The benefit formula is progressive, meaning that lower-income workers receive a benefit equal to a higher proportion of their average income than upper-income workers receive. The program is expected to continue to collect more in payroll taxes than it pays out in benefits until about 2018.
Unused payroll taxes are borrowed by the federal government and replaced by special-issue Treasury bonds. After the system begins to pay out more than it receives, the federal government will cover the resulting cash flow deficits by repaying the special-issue Treasury bonds out of general revenues. When the bonds run out in about 2042, Social Security benefits will automatically be reduced to a level equal to incoming revenue. This is projected to require a 27 percent reduction in 2042, with greater reductions after that.
The DeMint Plan
Representative Jim DeMint (R-SC) has introduced a voluntary personal retirement account (PRA) plan that would establish progressively funded voluntary individual accounts for workers under age 55 on January 1, 2005. The amount that goes into each worker's account would vary according to income, with lower-income workers able to save a higher percentage. For average-income workers, the account would equal about 5.1 percent of income.
The government would pay the difference between the monthly benefit that can be financed from an annuity paid for by using all or some of the PRA and the amount that the current system promises. The sum of the annuity and the government-paid portion of Social Security would be guaranteed at least to equal benefits promised under the current system, and 35 percent of PRA assets would be invested in government bonds to help pay for any Social Security cash flow deficits. This proportion would be reduced gradually in the future. General revenue money would be used to pay for additional cash flow deficits.
The Graham Plan
Senator Lindsay Graham (R-SC) has proposed a plan that would give workers under age 55 (in 2004) three options. (Workers above the age of 55 would be required to remain in the current system and would receive full benefits.)
Under Option 1, workers would establish PRAs funded with part of their existing payroll taxes, equal to 4 percent of pay up to a maximum of $1,300 per year. Workers' benefits would be reduced by changing the benefit indexing formula from the current wage growth index to one based on consumer prices. Over time, this change would reduce benefits for workers at all income levels, but the effect on lower-income workers would be eased by a mandated minimum benefit of at least 120 percent of the poverty level for workers with a 35-year work history. The government-paid monthly benefit would be further reduced to reflect the value of the PRA. This reduction would be calculated using the average earnings of government bonds so that, if the PRA earned more than government bonds, the total monthly benefit would be higher. Option 1 also raises survivor benefits to 75 percent of the couple's benefit for many survivors.
Option 2 is essentially the same as Option 1, but without PRAs. The government would pay all benefits for workers who choose this option. Option 2 includes both the basic benefit reduction and the minimum benefit requirement.
Option 3 pays the same level of benefits promised under current law, but workers who select this option would pay higher payroll taxes in return. Initially, the payroll tax rate for retirement and survivors' benefits would increase from 12.4 percent of income to 14.4 percent of income (counting both the worker's and the employer's shares of the tax). In subsequent years, the tax rate would continue to climb in 0.25 percent increments.
The Smith Plan
Representative Nick Smith (R-MI) has proposed a voluntary PRA plan that would create personal retirement savings accounts funded with an amount equal to 2.5 percent of income, paid out of existing payroll taxes. This would increase to 2.75 percent of income in 2025 and could become larger after 2038 if Social Security has surplus cash flows. Retirement and survivors' benefits would be reduced by an amount equal to the value of lifetime account contributions plus a specified interest rate.
The Smith plan would also make many changes in Social Security's benefit formula, mainly affecting middle-income and upper-income workers. These changes would eventually result in most workers receiving a flat monthly benefit of about $550 in 2004 dollars. It would also gradually increase the retirement age for full benefits and require that all newly hired local and state workers be covered by Social Security. The Smith plan transfers $866 billion from general revenues to Social Security between 2007 and 2013 to help cover cash flow deficits and allows additional general revenue transfers when needed after that.
The Ferrara Plan
Peter Ferrara, Director of the International Center for Law and Economics, has proposed a plan that would create voluntary PRAs that would be funded according to a progressive formula that allows lower-income workers to save a higher proportion of their payroll taxes than upper-income workers. Average-income workers could save about 6.4 percent of their income. Workers would be guaranteed that the total of their PRA-generated benefits and government-paid monthly benefits would at least equal the benefits promised under the current system.
Any Social Security cash flow deficits that remain would be financed through general revenue transfers equal to a 1 percent reduction in the growth rate of all government spending for eight years, the corporate income taxes deemed to result from the investment of personal account contributions, and issuing about $1.4 trillion in "off-budget" bonds. Under the Ferrara plan, these bonds would be considered a replacement for the existing system's unfunded liability and thus would not increase the federal debt.
The Orszag-Diamond Plan
Peter Orszag, Senior Fellow at the Brookings Institution, and Peter Diamond, Institute Professor of Economics at the Massachusetts Institute of Technology, have developed a plan that does not include any form of PRA or government investment of Social Security trust fund money in private markets. Instead, it gradually changes the benefit formula to reduce benefits for moderate-income and upper-income workers and requires that all state and local government workers come under Social Security. It would also gradually reduce benefits by raising the age at which workers could receive full benefits. Workers could still retire earlier, but at lower benefits. Benefits would increase for lower-income workers, widows, and the disabled.
In addition, the plan would gradually increase the payroll tax for all workers from the current 12.4 percent of income to 15.36 percent of income in 2078. It would also raise the earnings threshold on Social Security taxes--thus requiring higher-income workers to pay additional payroll taxes--and impose a new 3 percent tax on income above the earnings threshold. Workers would not receive any credit toward benefits for income covered by this new tax.
Statements by the SSA Chief Actuary's Office on Each Reform Plan
The Social Security Administration has evaluated each of the reform plans.
The DeMint Plan. "Under plan specifications described below the Social Security program would be expected to meet its benefit obligations throughout the long-range period 2003 through 2077 and beyond."1
The Graham Plan. "[A]ll participation levels would be expected to result in sustainable solvency for the foreseeable future, as trust fund ratios are projected to be rising substantially at the end of the 75-year projection period."2
The Smith Plan. "Enactment of this proposal, assuming universal participation in Option 1, is expected to eliminate the estimated long-range OASDI [Old-Age, Survivors, and Disability Insurance] actuarial deficit (1.92 percent of taxable payroll under present law) based on "intermediate" assumptions described below and to result in sustainable solvency for the foreseeable future."3
The Ferrara Plan. "Under the plan specifications described below the Social Security program would be expected to be solvent and to meet its benefit obligations throughout the long-range period 2003 through 2077 and beyond."4
The Orszag-Diamond Plan. "This proposal would, through a combination of increases in taxes and coverage, reductions in the general growth of benefits levels, and certain enhancements to benefit protections, restore solvency to the OASDI program over the 75-year projection period under the intermediate assumptions of the 2003 Trustees Report. Moreover, as the projected trend in the ratio of Trust Fund assets would be stabilized and even rising slowly at the end of the period, The OADSDI program would be made sustainably solvent under these assumptions for the foreseeable future."5

1. Personal Retirement Accounts

What Is This, and Why Is It Important?
Allowing workers to invest a portion of their Social Security taxes is the only alternative to raising Social Security taxes or reducing Social Security benefits. However, personal retirement accounts are not all equal. The money that goes into the PRAs could come from diverting a portion of existing Social Security taxes or from some other source. (See Table 1.)
Similarly, the size of the accounts (usually expressed as a percentage of the worker's pay) is important. While larger accounts would temporarily increase the amount of additional funds required to pay benefits to retirees, they would also accumulate a pool of money faster than smaller accounts and finance a greater portion of benefits in future years. This can reduce the amount of additional tax dollars needed in future decades.
Finally, how the PRAs are invested is important. Even though they show steady growth over time, stocks and commercial bonds are generally more volatile than government bonds. Investing a portion of the PRAs in government bonds makes the accounts slightly less volatile while providing some of the additional dollars needed to pay benefits to current retirees.

2. Retirement and Survivors Benefits

What Is This, and Why Is It Important?
Other than creating personal retirement accounts that allow workers to self-fund all or a portion of their Social Security retirement benefits, most reform plans deal with the program's coming deficits by either changing the level of retirement benefits promised or finding ways to increase program revenues. This section examines how various reform plans treat promised retirement benefits. (See Table 2.)
Social Security uses a complex formula to calculate an individual worker's retirement benefits. Subtle changes in this formula can cause a large change in benefits over time. For instance, changing how past income is indexed to a constant purchasing power will have only a minor impact for the first several years. However, the effect is cumulative and after several decades will result in major changes in benefits.
Similarly, seemingly minor changes in "bend points"39 or other aspects of the benefit formula can, over the long term, cause major changes in benefits for upper-income and/or moderate-income workers. It is even possible to use the benefit formula to approximate an increase in the full retirement age without actually raising it. Thus, a plan could still allow workers to qualify for "full retirement benefits" at 65, 66, or 67 but award them full retirement benefits (as defined under the current system) only if they wait to retire until a later age.
The first question that any plan must answer is whether it would pay the full level of benefits promised under the current system. If so, it must deal with how to pay the cost, since the current system cannot afford to pay for all of the promised benefits. Other important questions include whether the plan proposes benefit changes (usually reductions) if workers do not choose to have a personal retirement account, protects lower-income workers (who more often have an interrupted work history) by instituting some sort of minimum benefit level, and/or addresses the low benefits for certain lower-income, widowed, and disabled workers under the current system.

3. Payroll Taxes

What Is This, and Why Is It Important?
Increasing Social Security payroll taxes would be one way to pay projected cash flow deficits. This method is closer to the self-funding that has characterized the system so far, but raising payroll taxes has significant drawbacks. Alternatives to payroll tax increases include instituting some form of personal retirement account to increase the return on taxes, reducing benefits, and using significant amounts of general revenue money to cover Social Security's cash flow deficits. (See Table 3.)
Currently, all workers pay 5.3 percent of their income to pay for Social Security retirement and survivors benefits. In 2004, this tax will be paid on the first $87,700 of an employee's income.40 Employers match this tax for a total of 10.6 percent of each worker's income. In addition, both employer and employee pay an additional 0.9 percent of the worker's income (1.8 percent total) for Social Security disability benefits. Thus, the employer and employee pay a total Social Security payroll tax of 12.4 percent.41
Additional payroll taxes could be collected in three ways:
The overall tax rate could be increased. However, this imposes higher taxes on all income groups and could reduce employment in the economy by making it more expensive to hire additional workers.
The tax could be imposed on income levels above the threshold, currently at $87,700. In the short run, this would increase revenues, but since retirement benefits are paid on all income taxed for Social Security, it would also eventually increase the amount of benefits the system would have to pay each year and offset the amount raised through the higher taxes.
Payroll taxes could be disconnected from the benefit formula. This could take the form of a new tax paid on income above the current $87,700 earnings threshold, collecting taxes on income up to the $87,700 level but counting only income up to $60,000 or some other level toward benefits, or some combination of the two. In either case, this type of tax would break the link between taxes and income that has existed since Social Security began in 1935. To date, neither the right nor the left has been willing to break this link for fear that it would be the first step toward turning Social Security into a welfare system. Both sides have worried that such a move--or even the perception of such a move--would undermine the program's widespread support among the American people.

4. Social Security's Unfunded Liability

What Is This, and Why Is It Important?
Both the current Social Security system and every plan to reform it will require significant amounts of general revenue money in addition to the amount collected through payroll taxes. This additional money is necessary to reduce the difference between what Social Security currently owes and what it will be able to pay.
In the reform plans, the transition cost represents a major reduction from the unfunded liability of the current program. Even though the reform plans are expensive, all of them would require less additional money than the current system. However, both the amount and the timing of this additional money would vary depending on the plan. (See Table 4.)
The amount of additional money that is needed can be measured according to two different systems. Both measurements give valuable information.
Present value reflects the idea that a dollar today has more value to a person than that same dollar has sometime in the future. It gives an idea of when the additional money is needed by giving greater weight to money needed in the near future than to an equal amount needed further in the future. In addition to showing the amount of money needed, a higher present value number indicates that money is needed sooner rather than later.
The sum of the deficits indicates the total amount of additional money that will be needed. This measure gives $100 needed today the same weight as $100 needed in 15 years. This measure adds up only the future cash flow deficits; it does not include cash flow surpluses because the government does not have any way to save or invest that money for future use. Using both of these measurements gives a better picture of the situation than using just one.
Paying for the current system or any of the reform plans will require Congress to balance Social Security's needs against those of the rest of the economy. In general, as more additional dollars are needed for the current system or a reform plan, less money will be available for other government programs and the private sector.
As this burden on the general federal budget increases and persists, Congress would find it increasingly more difficult to come up with that money, and it would become increasingly less likely that such a plan would really be paid for on schedule. This is especially true for the current system, which will incur the massive deficits to pay all of the promised benefits.
The numbers used in Table 4 were calculated by the Office of the Chief Actuary using static scoringmethods. Dynamic scoring would give a more complete picture of the economic effects of each plan, allowing analysts to compare a plan's ability to create jobs, increase savings, and generate economic growth. In many cases, economic growth associated with a reform plan could increase or reduce the amount of general revenue required to finance it. Regrettably, the Social Security Administration does not offer dynamic scoring at this time.

5. Paying for Social Security's Unfunded Liability

What Is This, and Why Is It Important?
Both the current Social Security program and all of the proposed reform plans will require large amounts of general revenue money to cover the annual cash flow deficits. Exactly when that money is first needed, how many years it will be needed, and the total amount that will be needed varies from plan to plan. Avoiding use of general revenue money would require either reducing Social Security benefits enough to eliminate the annual deficits or imposing new taxes to generate sufficient revenue. Neither the current system nor any of the proposed reform plans comes close to closing the gap.
Some plans do specify sources for the needed general revenues (See Table 5.), but these are handicapped by the fact that no Congress can bind the hands of a future Congress. Thus, even if Congress did pass a plan that specified the source of the needed general revenues, a future Congress could change the plan by a majority vote. The only way to avoid this uncertainty would be for Congress to pass and the states to ratify the plan as a constitutional amendment--which would be prohibitively difficult.
In short, both the current system and all known reform plans would have to find the necessary general revenues from some combination of four sources: borrowing additional money, collecting more taxes than needed to fund the rest of the government, reducing other government spending, or reducing Social Security benefits more than is called for under either current law or any of the reform plans.
The most important thing to remember is that the existing Social Security system and the reform plans all face this problem. This is not a weakness that is limited to PRA plans or any other reform plan. The only question is when the cash flow deficits begin and how large they will be.
Current Law
Current law makes no provision for funding Social Security's unfunded liability. The program has no credit line with the U.S. Treasury, and when its trust fund promises are exhausted, current law will require it to reduce benefits.
The DeMint Plan
While some press releases connected with Representative DeMint's plan suggest that some of its general revenue needs could be generated by reducing the growth of federal spending, no language specifying where the general revenues would come from is included in his legislation.
The Graham Plan
Senator Graham's plan in-cludes a commission that would recommend reductions in corporate welfare and redirect the savings to reduce his plan's unfunded liability. At best, a reduction in corporate welfare would generate only part of the needed general revenue. The commission would produce a legislative proposal that would then be considered by Congress.
Because the commission would be created by the same legislation that implements Graham's Social Security reforms, its recommendations could not even be considered until after the plan is enacted. As a result, passage of the Graham plan does not guarantee that these revenues would be available. Regardless of what the commission recommended, a future Congress could reject the proposed cuts in corporate welfare. In that case, Congress would have to come up with another method to raise the needed revenue.
The Smith Plan
Other than the proposed benefit changes that would partially reduce Social Security's unfunded liability, the Smith plan does not specify how it would pay cash flow deficits.
The Ferrara Plan
The Ferrara plan includes three mechanisms designed to create the needed general revenues.
First, it would mandate a 1 percent reduction in the growth of all federal spending (including entitlements such as Social Security) for at least 8 years and redirect that revenue to Social Security. Since Congress cannot legally force a subsequent Congress to follow a set course of action, the only enforcement mechanism available is a constitutional amendment. As a result, the Ferrara plan simply
appropriates to Social Security the amount of revenue that would result if Congress were to reduce spending growth. In practice, a future Congress could choose not to reduce spending growth and, instead, just let the deficit grow larger or generate the necessary revenue in some other way.
Second, the Ferrara plan would transfer to Social Security the amount of corporate income taxes that could potentially result from the investment of personal accounts in corporate stocks and bonds. This is not a new or higher tax. This transfer is intended to reflect the taxes that would be paid at the current 35 percent corporate tax rate. Since SSA does not conduct dynamic scoring, this transfer is based on the static assumption that two-thirds of the stocks and bonds held through personal accounts reflect domestic corporate investment.
Third, the Ferrara plan would borrow about $1.4 trillion in special off-budget bonds. However, there is no practical way to create off-budget bonds that would not count against the federal debt. Even if there were, such a move would reduce the amount of transparency in the federal budget.
The Orszag-Diamond Plan
While the Orszag-Diamond plan includes both some benefit reductions and benefit increases for widows, the disabled, and low-income workers, the two elements of the plan are roughly equal. It reduces Social Security's unfunded liability using tax increases contained in the plan, including an increase in the payroll tax rate, a gradual increase in the amount of income subject to Social Security taxes, and a new 3 percent tax on any salary income not subject to Social Security taxes.

6. Making Social Security a Better Deal for Workers

What Is This, and Why Is It Important?
In the long run, a reform plan should do more than just preserve the current Social Security system with its many flaws. While a key requirement of any reform plan is to provide a stable, guaranteed, and adequate level of benefits at an affordable cost, it should do more. (See Table 6.)
The current system fails to allow workers to build any form of nest egg for the future. Instead, it is the highest single tax for about 80 percent of workers. In return, each worker receives a life annuity that ends with the death(s) of the worker, the surviving spouse (if there is one), or young children (if any). In today's world, where two-earner families are increasingly the norm, the current system even limits survivor benefits to the higher of either the deceased spouse's benefits or the surviving spouse's benefits. Whichever account is lower, no matter how long that spouse worked, is marked paid in full and extinguished.
At a minimum, a reform plan should allow workers to pass on some of what they earned and paid in Social Security taxes to improve their spouse's retirement benefits. It should also allow workers the flexibility to use their entire account for retirement benefits or take a smaller retirement benefit and use the balance to pay for a grandchild's college education, start a small business, or pass on money to a later generation.
In judging whether each proposed reform would be better for America's workers, readers may differ sharply. However, while most summaries and studies examine Social Security reform from the viewpoint of federal budget impact, tax rates, and the survivability of the system, few consider the overall impact of reform on the workers it was designed to benefit in the first place. Social Security should not be reformed or "saved" for its own sake, but only if it more effectively provides the benefits workers need at a price they can afford.

David C. John is Research Fellow in Social Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

1. Stephen C. Goss, Chief Actuary, Social Security Administration, "Estimated Financial Effects of H.R. 3177, the `Social Security Savings Act of 2003,'" memorandum to Representative Jim DeMint, September 26, 2003, at (February 28, 2004).
2. Chris Chaplain, Actuary, and Alice H. Wade, Deputy Chief Actuary, Social Security Administration, "Estimated OASDI Financial Effects of `Social Security Solvency and Modernization Act of 2003' introduced by Senator Lindsey Graham," memorandum to Stephen C. Goss, November 18, 2003, at (February 28, 2004).
3. Chris Chaplain, Actuary, and Alice H. Wade, Deputy Chief Actuary, Social Security Administration, "Estimated Long-Range OASDI Financial Effect of a Proposal Developed by Representative Nick Smith," memorandum to Stephen C. Goss, September 10, 2003, at (February 28, 2004).
4. Stephen C. Goss, Chief Actuary, Social Security Administration, "Estimated Financial Effects of `The Progressive Personal Account Plan,'" memorandum to Peter Ferrara, December 1, 2003, at (February 28, 2004).
5. Stephen C. Goss, Chief Actuary, Social Security Administration, "Estimates of Financial Effects for a Proposal to Restore Solvency to the Social Security Program," memorandum to Peter Diamond and Peter Orszag, October 8, 2003, at (February 28, 2004).
6. Alternative sources of funds for the PRAs would require either additional savings or additional taxes. In both cases, the result would lower the overall rate of return because the worker would be paying more.
7. Some plans offer additional investment options. All stock investment options would be invested in stock index funds, not individually selected stocks. Similarly, government and commercial bond investments would be in broadly based pools of bonds rather than in individually selected bonds.
8. At least initially, all accounts are managed by a single entity offering limited investment choices. This structure significantly reduces administrative costs. In all cases, the fund management would be contracted out to a private manager by a government supervisory agency, similar to how federal workers' Thrift Savings Plan is managed. Some plans would allow workers to select another funds manager when their accounts reach a certain size.
9. Workers could contribute up to an additional $5,000 to their account. Lower-income workers could receive a matching government contribution of up to $500 for their additional contributions.
10. This is the average account size for median-income workers. Lower-income workers could put a higher percent of their income into a PRA than higher-income workers. This progressive feature approximates the current Social Security system, which gives lower-income workers higher benefits for their taxes than higher-income workers receive.
11. The account is centrally managed at first. When assets reach $5,000, the worker could select additional investment choices.
12. Workers could contribute up to an additional $2,000 and receive a partial tax credit. They could also roll over money from other retirement accounts into their Social Security PRA. Low-income workers could receive an additional $300 from the government to their account.
13. When the account reaches $10,000, the worker could switch to one of several privately managed investment choices approved by the Secretary of the Treasury.
14. If Social Security's finances improve, larger accounts could be allowed after 2038.
15. When an account reaches $2,500, the worker could switch to a private funds manager.
16. While a central administrator would collect and distribute account contributions, all investments would be in privately managed funds.
17. Some experts are concerned that PRAs could result in lower benefits for low-income workers because they may have intermittent work histories. A guaranteed minimum benefit would provide additional protections for these workers.
18. For many years, experts on all sides of the debate have criticized the current system for providing inadequate benefits to a surviving spouse. They have also expressed concern that benefit changes for retirees and their survivors would be unfair to those receiving benefits under Social Security's disability program.
19. Under current law, Social Security will automatically reduce the benefits when the trust fund runs out in 2042. From that point on, Social Security would only pay benefits equal to its cash flow. The SSA estimates that this would immediately reduce benefits by 27 percent in 2042, with larger reductions in subsequent years.
20. Under current law, Social Security uses the same benefit formula to compute both retirement and disability benefits. When a disabled worker reaches full retirement age, the worker's benefits switch from being paid by the disability program to being paid through the retirement and survivors program.
21. The DeMint plan would guarantee future retirees at least the same level of benefits as under the current system.
22. The DeMint plan would guarantee workers at least the same level of benefits as under the current system, but does not provide for a higher minimum benefit.
23. Under the DeMint plan, disability benefits would not changed. The PRA of a deceased spouse would be added to the surviving spouse's PRA account after subtracting the amount needed to pay benefits to any survivors. If there are no survivors, the PRA would go to the worker's estate.
24. The Graham plan allows workers to lock in the current level benefits if they are willing to pay higher payroll taxes. If a worker chooses that option, payroll taxes would climb to 14.4 percent from the current 12.4 percent (counting both the employer and employee shares). It would increase further if a higher rate were necessary to pay benefit levels promised under current law. If a worker chooses another option, the worker's benefits would be reduced below the level promised by the current system.
25. The Graham plan would change how benefits are calculated when the worker retires, from the current method of indexing past earnings to wage growth in the economy to indexing based on inflation and price growth. This would gradually reduce benefits. Workers who choose to pay higher payroll taxes would avoid this reduction.
26. The Graham plan sets a minimum benefit at 120 percent of the poverty level in 2011 for workers with a work history of at least 35 years.
27. Under the Graham plan, disability benefits would not change from the current level. However, when a disabled worker reaches retirement age, the retirement benefits could be reduced to reflect changes in benefit formulas during times when the worker was not on disability. Surviving spouses would receive at least 75 percent of the benefit received when both spouses were alive, subject to some restrictions. If a worker chooses to have a PRA, the balance in that account would be transferred to the spouse's account when the worker died.
28. The Smith plan includes a variety of benefit reductions that would reduce benefits for almost all retirees below the level promised by the current system.
29. The Smith plan would make many changes to Social Security's benefit formula, primarily affecting middle-income and upper-income workers. For most workers, it would eventually result in a flat monthly benefit of about $550 per month (in 2004 dollars). It would also gradually increase the retirement age for full benefits.
30. While there is no set minimum benefit as contained in some other plans, lower-income workers would receive additional credits into their PRA and any benefit reductions that would otherwise affect them would be limited by a maximum reduction.
31. Under the Smith plan, lower-income disabled workers would not be affected by reductions to the benefit formula. Disabled workers with incomes above the threshold would see a minimum benefit level. Benefits could be adjusted.
32. The Ferrara plan would guarantee future retirees at least the same level of benefits as under the current system.
33. The Ferrara plan would not provide for a higher minimum benefit.
34. The Ferrara plan does not address disabled workers in any detail. However, because the plan is based on the combined trust fund of both the retired/survivors program and the disability program, one could assume that disability benefits would be paid out of a PRA and that current disability benefits would also be guaranteed. Spouses are guaranteed current law benefits. Upon the death of one spouse, the balance in the PRA would be transferred to the surviving spouse's PRA.
35. The Orszag-Diamond plan includes a number of benefit reductions that would especially affect upper-income and middle-income retirees. It also effectively increases the retirement age for all income levels by making it impossible for workers to get their full benefits unless they choose to delay retirement beyond the current normal retirement age.
36. The Orszag-Diamond plan would gradually change the benefit formula to reduce benefits for moderate and upper-income workers. Although workers could still retire earlier, they would receive lower benefits.
37. The benefit for minimum wage workers with at least 35 years of work history would be phased in over time, with the benefits reaching at least the poverty level by 2012. This benefit would gradually increase in subsequent years.
38. Surviving spouses would be guaranteed a benefit of at least 75 percent of the amount that the couple received when both were still living. Benefits for disabled workers would not be affected by changes to retirement and survivor's benefits.
39. The benefit formula used by the current Social Security system develops an "average indexed monthly earnings" for each worker by indexing his or her highest 35 years' earnings covered by Social Security taxes according to the growth in wages that has occurred between the date they were earned and the date that the benefit calculation is being made. In the next step, the actual retirement benefit is calculated. In 2003, the formula paid benefits equal to 90 percent of the first $606 of a worker's average indexed monthly earnings, 32 percent of the amount between $606 and $3,653, and 15 percent of any indexed earnings above $3,653. The divisions between the 90 percent, 32 percent, and 15 percent levels are called bend points.
40. This threshold is indexed and changes each year.
41. Although the federal government considers the employer's matching share as a separate item, most employers add their portions of the Social Security tax to a worker's salary when calculating the true cost of an employee.
42. Under the current system, workers pay taxes on the first $87,700 of income, which is indexed and changed each year. Plans marked with "yes" would impose an additional tax increase.
43. Benefits are currently calculated using all of the income upon which the worker paid Social Security taxes. Plans marked "yes" would break this link. Many analysts on both the left and the right believe that breaking this link would be the first step toward changing Social Security into a welfare system.
44. Workers would have the option of maintaining the current level of promised benefits in exchange for a payroll tax increase.
45. Total payroll tax rates (including the tax for disability benefits) would increase from the current 12.4 percent of income (the employee and employer shares combined) to 15.36 percent by 2078.
46. Between 2005 and 2063, the Orszag-Diamond plan would gradually raise the amount of income subject to Social Security taxes by 0.5 percent points annually, in addition any increases under the current formula.
47. The Orszag-Diamond plan would impose a new tax of 3 percent on all income above the current taxable earnings limit; however, workers would not receive any credit toward Social Security benefits for income subject to this tax. The plan's authors estimate that this tax would increase to 3.5 percent by 2080.
48. All dollar amounts are in billions of 2003 dollars.
49. Present value is a measurement of the amount of money that if invested today would finance future benefit payments. For example, if Social Security will owe $1,000 in 30 years and assuming that an investment would earn an average of 3 percent every year after inflation (a growth rate equal to what government bonds pay), the present value of the $1,000 due in 30 years is $412. (Invested at a 3 percent interest rate, $412 will grow to $1,000 in 30 years.) Because the money is assumed to grow over time, a dollar needed in the future counts as less in present value terms than a dollar needed today.
50. This is another measurement of the amount of additional money needed. In this case, the "additional amount" is the total amount of additional federal revenues required to fund the transaction. Surpluses (if any) are not included since current law does not allow the government to do anything with excess cash except spend it. Under this method, if Social Security needed $1 billion in 2005 to make benefits payments and another $1 billion in 2025, the additional amount would be the total of $2 billion.
51. The current Social Security system will require additional revenues in excess of $100 billion annually for 57 years, in excess of $300 billion annually for 45 years, and in excess of $400 billion annually for 33 years.
52. The DeMint plan will require additional general revenues in excess of $100 billion annually for 35 years. It will not require additional general revenues in excess of $300 billion annually in any year.
53. The Graham plan will require additional general revenue in excess of $100 billion annually for 32 years. It will not require additional general revenues in excess of $300 billion annually in any year.
54. This scoring assumes that 100 percent of eligible workers would choose to have a personal retirement account. The plan was also scored for 67 percent and 0 percent participation, both of which require less additional general revenue dollars.
55. The Smith plan will require additional general revenues in excess of $100 billion annually for 24 years. It will not require additional general revenues in excess of $300 billion annually in any year
56. Supporters of the Ferrara plan believe that the maximum annual deficit would be $49 billion in 2005 if the various methods that it uses to finance the transition are taken into consideration. However, this section of the paper deals only with the size of the necessary general revenue transfers, not how the plans propose to finance them. The next section discusses how plans propose to find the necessary general revenues.
57. The Ferrara plan will require additional general revenues in excess of $100 billion annually for 47 years, in excess of $300 billion annually for 30 years, and in excess of $400 billion annually for 20 years.
58. The Orszag-Diamond plan will require additional general revenues in excess of $100 billion annually for 45 years. It will not require additional general revenues in excess of $300 billion annually in any year.
59. This is the most subjective measure in this paper. It compares the retirement benefits offered under the reform plan to the amount of general revenue money that is needed to finance it, while taking into consideration both changes in taxes (if any) and the ability to build a nest egg. It compares these to what the current system would be able to pay rather than what it promises.
60. Upon a worker's death, any remaining PRA balance would be transferred to the PRAs of any survivors or the worker's estate if there are no survivors.
61. Under the DeMint plan, workers may annuitize either all of their PRAs or 35 percent. However, the total income generated from a combination of the annuity and any government-paid benefit must total at least a poverty level income. If annuitizing 35 percent of the PRA does not reach this level when combined with a government-paid benefit, then enough of the PRA must be annuitized to reach that level. Any money not annuitized may be used for any purpose,
62. The DeMint plan would allow workers to improve their retirement benefits over the current system. While it has somewhat higher general revenue costs than other plans, it also guarantees a higher level of benefits and allows workers to build a nest egg for the future. The plan contains an innovative method to reduce general revenue costs by requiring workers with personal accounts to invest a certain proportion of their account in government bonds, and it contains the most progressive personal account contribution rate of any of the plans. This would allow it to closely match the current system's progressive benefit levels through its account structure alone.
63. The Graham plan requires workers to annuitize enough of the personal retirement account to provide a poverty-level income for their households, when combined with the government-paid monthly benefit. Any remaining amount may be used for any purpose.
64. The flexibility contained in the Graham plan offers workers much more control over their futures. Each worker would have the opportunity to decide the level of benefits, cost, and risk. The plan offers benefits above the current system at a relatively low general revenue cost. It also allows workers the opportunity to build a nest egg.
65. Under the Smith plan, the treatment of a deceased worker's PRA is less clear. It appears that upon a worker's death, any remaining PRA balance would be transferred to the PRAs of any survivors or the worker's estate if there are no survivors.
66. The Smith plan requires workers to annuitize enough of the personal retirement account to provide a poverty-level income for their households, when combined with the government-paid monthly benefit. However, unlike most other personal account plans, workers must either annuitize the full PRA or make regular withdrawals from amount remaining in the PRA after annuitization, although the worker may only draw enough so that the total lasts throughout retirement. The worker does not have the option of using remaining money for other purposes than retirement.
67. Overall, the Smith plan's benefit to workers is questionable. While general revenue costs are comparatively low, the eventual severe reduction in benefits will transform Social Security into a low flat-rate benefit that is substantially less than the current system's average benefit level. The plan also offers only very limited opportunities to build a nest egg. If the Smith plan were enacted, some form of almost mandatory occupational pension savings plan would be needed to provide workers--and especially lower-income workers--with a decent standard of living during retirement.
68. Under the Ferrara plan, workers must buy an annuity that pays a monthly amount equal to the worker's Social Security benefits under the current system. If the account is not large enough to buy the annuity, the federal government would make up the difference. Any money not annuitized may be used for any purpose.
69. The Ferrara plan could potentially improve workers' retirement benefits, but its substantial costs and financing mechanism may offset these benefits. While workers would be guaranteed at least the same level of retirement benefits as under the current system and would have the opportunity to build a nest egg, the higher general revenue taxes necessary to finance the plan make an overall improvement questionable.
70. The Orszag-Diamond plan does not create any form of personal retirement account.
71. Under the Orszag-Diamond plan, workers would pay higher payroll taxes for lower Social Security benefits, with no opportunity to build a nest egg. Furthermore, workers would receive no benefit for the substantial and perpetual general revenue transfers required to finance this plan.

? 1995 - 2004 The Heritage Foundation
President Bush's Tax Plan Would Improve the Ability to Deal with Future Social Security Deficits
by David C. John
Executive Memorandum #858

February 6, 2003
President George W. Bush's proposed tax cut plan would increase economic growth and make it easier to afford the additional money required for Social Security reform. The President's dividend tax proposal alone is expected to create an average of 512,000 new jobs each year and increase GDP by over $79 billion annually, according to dynamic economic estimates prepared by The Heritage Foundation's Center for Data Analysis.
An important but often ignored side effect of higher employment and economic growth is the strengthening of the Social Security trust fund due to extra payroll tax collections. Over just the first 10 years, the higher employment caused by the dividend tax proposal would also provide over $100 billion more to the Social Security trust fund than it is currently expected to receive. Significantly more resources will flow to that trust fund after the first 10 years. While this economic growth will not solve or even significantly delay Social Security's coming fiscal crisis, the additional money will make it easier for Social Security to meet its benefit obligations over the next several years.
Given these facts, one has to wonder why the President's critics charge that the tax plan would damage Social Security. Social Security is financially stable for now, but this will not always be the case. In 2017, Social Security will begin to pay more in benefits than it receives in payroll taxes. Unless the program is reformed, it will continue to run deficits for at least the next 60 years. Between 2017 and 2077, Social Security will require $25 trillion (in inflation-adjusted 2002 dollars) more than it will receive from payroll taxes just to meet its obligations.
How the Trust Fund Operates
The Social Security trust fund is a mechanism to pay future benefits, not a source of actual money that can be used to pay those benefits. Excess payroll taxes that are not needed immediately to pay benefits are loaned to the government in return for special-issue Treasury bonds. The bonds are really nothing more than an IOU and have no other value than as a promise to impose higher general revenue taxes on future workers. It is future higher taxes that will pay Social Security benefits. The annual payroll tax surpluses, which many thought were being used to build up a reserve for baby boomers, have already been spent on other government programs or to reduce the government debt.
When an employer pays income and payroll taxes to the Treasury on behalf of his or her employees, the employer sends in one periodic check or electronic fund transfer that represents both the total income taxes and the total Social Security payroll taxes that are due. That money is all deposited into Treasury's general fund with no distinction made between income and payroll taxes. On a regular basis, the Treasury estimates how much of its aggregate tax collections are due to Social Security taxes and credits the trust fund with that amount. No money actually changes hands; this crediting is strictly an accounting transaction. These estimates are corrected after income tax returns show how much in payroll taxes was actually paid in a specific year. Then individual workers are credited with the amount that was withheld from their paychecks.
Furthermore, Social Security benefit checks are actually Treasury checks. Each month, Social Security directs the Treasury to pay benefits to a list of individual recipients and tells Treasury how much each individual is to receive. The total amount that the Treasury pays to workers is subtracted from the bookkeeping entry representing the Social Security trust fund. Again, no money actually changes hands; the funds were always in a Treasury account.
If the bookkeeping entry shows any payroll tax funds that are not needed to pay benefits, the Treasury issues the Social Security Administration a special-issue Treasury bond in that amount. The bond acts as an IOU and promises to provide general revenue funds in that amount plus interest when Social Security needs additional money to pay benefits. After the trust fund has been credited with the IOUs, Social Security's extra tax collections are treated just like any other tax and spent to pay the government's bills. That money could be used to repay federal debt owned by the public or spent to pay for any other type of federal program from aircraft carriers to education research.
False Charges That the Tax Cut Would Hurt Social Security
President Bush's plan would not reduce Social Security's ability to pay benefits, alter the Social Security trust fund, or change the program's projected insolvency date. Because the proposed tax cut does not raise or lower Social Security payroll taxes, the program would remain able to pay all benefits owed through 2017, and its trust fund account would be credited with at least the same amount in IOUs.
Social Security's finances are accounted for separately from the rest of the government, and as long as the program collects enough payroll taxes each year to meet its current obligations, changes in other taxes do not affect its financial outlook. Regardless of whether the tax cut plan passes or not, excess Social Security taxes that are not needed to pay current benefits would continue to be swept into the government's general revenues and spent on a variety of programs just as they have been for decades.
Similarly, unified federal budget deficits or surpluses have no effect on Social Security's ability to pay benefits or the amount in IOUs that will go into the Social Security trust fund. The only change would be an estimated additional $100 billion in trust fund IOUs from increased economic growth. Legally, Social Security taxes must be used only for that program--with excess revenues loaned to the government. Even though Social Security payroll taxes are mixed in with other federal revenues when both are received, the separate accounting of those payroll taxes allows the program to remain unaffected. As long as Social Security runs an annual cash flow surplus, this will remain true.
Both the President and Congress should act to reform Social Security in the very near future. Every day that they delay only increases the eventual cost of reform. However, paying for that reform requires the economic growth that would be created by President Bush's tax plan. Charges that the tax plan would weaken Social Security or transfer money out of Social Security to the rich are simply wrong. Similarly, worries that the tax plan would take money that is needed to pay for Social Security reform are misplaced. What Social Security needs more than anything else is a growing, healthy economy.

David C. John is Research Fellow in Social Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

? 1995 - 2004 The Heritage Foundation
All Rights Reserved.

Posted by maximpost at 9:54 PM EST

Kerry's Clever Tax Cut
Politically, not bad. Economically, it hardly offsets his tax hikes.

Sen. John Kerry moved to the right of Walter Mondale by proposing a small cut in the corporate tax rate, which he would lower to 33 ? percent from 35 percent. In political terms, it's a clever ploy. In economic terms, it merely provides a small offset to the significant tax hikes Kerry proposes on capital formation, where he would slap small businesses, top-bracket taxpayers, dividends, and capital gains.
The Kerry proposal to rollback the Bush tax cuts would raise the after-tax cost and reduce the post-tax investment return on capital by more than 54 ? percent. Taking out the upper-bracket labor-income component -- which is still investment capital -- the Kerry tax hike would reduce investment incentives by nearly 47 percent and work-effort returns by more that 7 ? percent. A big hit.
Offsetting that, Kerry's corporate tax cut would raise after-tax returns on corporate income by almost 2 ? percent. But that's only a tiny amount compared to the overall tax-hike proposal.
Kerry would also terminate the extra-territorial tax credit for multinational companies with offshore operations. In doing so, he's both giving and taking away. More, he's pandering to the current political hysteria over so-called jobs outsourcing, a misinformation campaign that Kerry compounds with his threats to terminate a number of free-trade agreements.
As the profits of U.S. firms are taxed overseas as well as at home (when the income is transferred back to the U.S.), companies are unfairly double-taxed on their earnings. This is the big issue regarding the current corporate tax debate in Congress. Why should American companies be double-taxed on a worldwide basis when nearly all other foreign companies, including those in Europe, are only single taxed? (Europeans provide a rebate to their companies in the amount of the extra-territorial tax burden.)
U.S. multinational companies operate abroad, largely through foreign sales corporations, because that's where the market customers are. A little-known factoid shows that roughly 90 percent of all worldwide markets (in population terms) are located outside the U.S. When asked why he robbed banks, Willie Sutton responded, "That's where the money is." If you asked GE, Gillette, Intel, or Microsoft why they go offshore, they'd each say, "That's where the customers are."
Narrow-minded members of Congress who are obsessed with the phony outsourcing argument are trying to punish international companies, arguing that the "loophole" that lets corporations defer foreign-earned profits with a special tax credit is merely a reward for creating offshore jobs. This is Sen. Kerry's argument.
But the truth is, the territorial tax break is only a small part of the corporate rationale to locate part of an operation overseas. The greater justification is to be closer to foreign customers. And yes: Why should companies be double-taxed at home and abroad?
As for the outsourcing argument, that's old-fashioned fear-mongering. Recent trade data show that there's far more insourcing of service jobs from foreigners who invest directly in the U.S. than outsourcing of jobs from U.S. foreign investment. In manufacturing there is a net outsourcing, but that number hasn't changed in 20 years, a period during which the U.S. created 38 million new domestic jobs. "Outsourcing" today is a phony war against American business and open international trade.
Surprisingly, the Bush administration has not weighed in on the corporate tax-cut issue necessary to accommodate a WTO ruling that the extra-territorial tax-credit is illegal. The most sensible solution would be a reduction in the marginal tax rate on corporate income from 35 percent to somewhere around 30 percent.
House Ways and Means chair William Thomas is trying to get a 3 percent cut in the corporate rate. So Sen. John Kerry has weighed in with a smaller 1 ? percent drop. Again, he's clever. Democrats don't usually propose cutting tax rates.
But Kerry's rollback of dividends, cap-gains, and the top-bracket tax cuts instituted by President Bush would do great harm to the economic recovery and the stock market boom. Higher after-tax returns that reduce the risk of owning stock have attracted investors back to equities. After a three-year bear market, these higher post-tax returns were exactly what the doctor ordered.
The choice come November is clear. Bush is the pro-investor candidate, which should provide him with a comfortable reelection majority. (Two of every three voters were stock market investors in the 2002 and 2000 election cycles.) But a recent poll by Scott Rasmussen shows that only 36 percent of likely voters (down from 44 percent in January) believe that Bush is doing a good or excellent job with the economy.
Bush has work to do. Both the economy and the markets are recovering strong, but the president can't be bashful in making his case with clarity and vision.
-- Larry Kudlow, NRO's Economics Editor, is CEO of Kudlow & Co. and host with Jim Cramer of CNBC's Kudlow & Cramer.
The Myth of a Jobless Recovery
by Tim Kane, Ph.D.
Executive Memorandum #917

March 25, 2004 | |
The alleged failure of the economy to create jobs is an illusion that stems from a survey of employment conducted each month by the U.S. Bureau of Labor Statistics (BLS), commonly known as the payroll survey. The payroll survey has problems measuring the modern workforce and contains a unique methodological problem: It systematically overcounts the jobs of many workers when they change employers. But worker turnover has declined significantly since the 1990s, artificially deflating payrolls.
Since the recession ended in November 2001, payroll jobs are down by over 700,000, in contrast to the additional 1.9 million Americans who say they are working, according to the latest Labor Department household survey. A close examination of the two surveys suggests that payrolls are missing something. Congress should not move to protect jobs or meddle in labor markets if, as the facts show, those markets are functioning well.
The payroll survey double-counts many workers who change jobs and is now artificially deflated because job turnover is down. Decelerating turnover in 2002-2003 explains up to 1 million jobs "lost" in the payroll survey since 2001.
The payroll survey does not count the surge in self-employment. The household survey has recorded a surge of 650,000 self-employed workers. This number may be even higher if modern workers in limited liability companies or in consulting positions with traditional firms are not identifying themselves as self-employed.
Revisions of the payroll survey have frequently been in the millions. Overestimates of 1 million payroll jobs were common in the early 1990s and also in 2002. Underestimates of 1 million jobs were common during the 1993-1996 period.
The disparity between the two BLS employment surveys is cyclical. The disparity widens during recessions and narrows during periods of rapid growth in gross domestic product (GDP). Such variation strongly suggests a statistical bias in one of the surveys.
The BLS household survey indicates record high employment. The disparity of 3 million jobs (in employment growth) between the household and payroll surveys since the recovery began is unprecedented.
Pessimists have tried to defend the payroll survey because it is bigger and less volatile than household survey data. The danger in the "bigger is better" rationale is mistaking quantity for quality. The big sample in the payroll survey is filled with double-counts and miscounts. The supposedly high monthly variability in the household survey is no worse than the large revisions in payroll data, except that revised payroll variability is historically invisible.
The Modern Workforce
One could think of the payroll survey as counting all the "brown-eyed" workers at traditional firms and "blue-eyed" workers at start-ups. It does not count "green-eyed" individuals who are self-employed, consult 20 hours a week, or simply home-school their children.
Further, workers who leave the IBM payroll for full-time consulting roles with IBM are still likely to consider themselves IBM employees. Likewise, partners at a limited liability company (LLC, a new company form) often consider themselves traditional employees, while the government classifies them as self-employed. The number of LLCs has swelled from near zero in 1993 to over 700,000. Clearly, a "hazel-eyed" workforce--self-employees who consider themselves payroll "brown-eyes"--is emerging. Yet these consultants and partners, like every farmer and sole proprietor in America, are considered jobless by the payroll survey.
Decelerating Turnover Since 2001
The payroll survey double-counts any individual who changes jobs during the pay period in which the worker is on two payrolls. "If a person leaves one job and starts another during a relatively short time span, they could appear on both employers' payrolls," said Labor Department economists in late 2003. Constant turnover means that the payroll survey systematically overestimates the level of jobs.
Because worker turnover has declined since 1999, the measure of payroll jobs has been deflated by up to 1.77 million jobs. In the two years since the recession ended, gross job flows are down by 1.2 percent, deflating the payroll survey by 1 million jobs. Thus, a net growth in payroll jobs in the real economy looks like a job loss in currently published data.
The bottom line is that either the current payroll data will be revised significantly or they will not. If they are revised, the household survey will be essentially vindicated. The more intriguing possibility is that there are structural problems within the payroll survey that have only just now surfaced in the wake of the odd recovery of the "new" economy. The loss of payroll jobs may be permanent as the workforce shifts to new forms.
Policymakers and analysts should treat payroll data with caution when making comparisons to employment levels in 2001 and earlier years. A better measure of employment is the household survey, and analysts can now point with confidence to the employment of an additional 1.9 million workers since the recession ended.
Tim Kane, Ph.D., is Research Fellow in Macroeconomics in the Center for Data Analysis at The Heritage Foundation.

? 1995 - 2004 The Heritage Foundation
All Rights Reserved.

Will the Real Unemployment Rate Please Stand Up?
by Timothy Kane
WebMemo #456

March 24, 2004
Big government types assert that the economy cannot recover without the government's help. The anemic, sluggish labor market is their main piece of evidence when arguing for more benefits for the poor, more taxes on the rich, higher minimum wages, and protection from international trade with impoverished Third World countries. The unwelcome sunshine on their gloomy parade for big government is the low rate of unemployment, currently at 5.6 percent.
Even pessimists know that 5.6 percent unemployment is close to what economists consider the "natural" rate or the non-accelerating inflation rate of unemployment. As a metric, the rate of unemployment is comparable to body temperature in that a sudden spike upwards is a powerful signal of ill health. But after a fever breaks, coming back to the normal level is healthy, and going much lower has risks of its own.
What is the Unemployment Rate?
Instead of arguing that the unemployment rate could or should be lower, critics are questioning the integrity of the way the rate is calculated. The basic idea is that the economy is so bad that workers are not even in the labor force, and so the unemployment rate today is not comparable to the rate five or ten years ago. For example, on March 19th, a Washington Post editorial claims that the unemployment rate is "above 7 percent" if "you add in discouraged workers."
The Post has been misinformed. The authoritative data on unemployment come from the Bureau of Labor Statistics (BLS), specifically table A-12 of the household survey, which calculates several different unemployment rates. Each is based on a nuanced definition of who is actually unemployed. Unemployment peaked in June 2003, and that peak is lower than the level of unemployment in the early 1990s for all measures of unemployment.
The rate of unemployment that includes discouraged workers is known as "U-4." It is currently 5.9 percent, which is 0.3 percent higher than the official rate, not the 1.4 percent gap imagined by the Post. Actually, the present gap between U-4 and the official unemployment rate is quite close to the historical average of 0.23 percent.
[Click CHART to enlarge]
As a refresher, the rate of unemployment in February 2004 is calculated by dividing the 8.17 million unemployed Americans by the 146.47 million people in the labor force. Paul Krugman's March 12 column in the New York Times is typical of attempts to explain away the low rate of 5.6 percent, saying it is "entirely the result of people dropping out of the labor force."
A fine argument, if only it were true. Chart 2 shows what is really happening. The household survey reports a surge in the size of the labor force (2.03m) and total employment (1.90m) since the end of the recession in November 2001. (
[Click CHART to enlarge]
Discouraged Workers?
So, what is the difference between discouraged workers and other marginally attached workers? As technically defined by the BLS, discouraged workers think that no work is available, and so they quit looking. In sharp contrast, other "marginally attached" workers think work is available but are not able to actively seek work for reasons such as child-care and transportation problems. They are specifically not discouraged, and it is inaccurate to describe them as such. It is even more inaccurate to describe every home-schooling parent and sole proprietor as jobless, but that is another story (
Those are the facts. But this is a political season, and often facts can't find their way into the headlines. Even so, anyone who is genuinely concerned about the U.S. economy should know that its temperature is fine. There are fewer discouraged workers as a percentage of the labor force today than in 2003, but also in comparison to 1994, 1995, and even 1996. Despite the fondest hopes of pessimists, today's low unemployment rate is the real deal.
? 1995 - 2004 The Heritage Foundation
All Rights Reserved.

The drug bill cost more than the Bushies let on.
In previous columns, I have warned that George W. Bush is in danger of appearing Nixonian -- that is, using Richard Nixon's political methods, such as a willingness to subordinate everything to a re-election effort, including abrogation of one's own principles; punishing staffers with genuine policy disagreements for being disloyal; and keeping secret information that might undermine decisions one has already made.
The clearest evidence yet of Bush as Nixon has arisen over the question of what the White House knew about the cost of the recently passed Medicare drug bill, when it knew it, and whether it actively suppressed information that might have caused the measure to fail in Congress. It is becoming harder and harder to believe that the administration was not knowingly engaged in deception in this matter. Increasingly, it appears that it knew perfectly well that the legislation would cost far more than $400 billion over 10 years -- the most Congress was allowed to spend under its rules -- and that it took extraordinary measures to suppress this fact.
The center of this situation is an obscure bureaucrat named Richard Foster, chief actuary for Medicare. It is his job to estimate spending for that program over long periods. Annually, he produces a report for Medicare's board of trustees, based on many complex mathematical calculations, that lays out the program's financial condition in excruciating detail. Foster's latest report was delivered Tuesday, March 23. It showed serious financial deterioration, largely due to the addition of a large unfunded drug benefit.
According to the New York Times, Wall Street Journal, and Knight Ridder news service, Foster knew last summer that the drug bill being debated in Congress would cost somewhere between $500 billion and $600 billion. In its latest budget, the administration conceded that the figure is $534 billion.
The problem is that everyone knew that a bill with a price tag that large would never get through Congress. The version that did pass only made it through with two votes to spare in the House of Representatives (and only after the vote was held open for an unprecedented 3 hours, while arms were twisted to get the necessary votes). Most of the pressure was brought to bear on conservative Republicans reluctant to vote for so much new spending when the budget was already in deficit.
Reportedly, the last couple of votes were secured after legislators were warned that an even bigger Democratic bill would be enacted unless they agreed to the White House plan. This was utterly dishonest. In the event that the administration bill went down to defeat, the House leadership would simply have pulled it off the floor while something new was cooked up. There was zero chance that something like the $1 trillion Democratic alternative would ever have become law.
Another argument being made by the drug bill's supporters is that only the Congressional Budget Office's estimate of $395 billion was binding. The administration's estimate would not have been official for legislative purposes. While this is technically true, it ignores the closeness of the vote and the fact that misgivings about the drug bill's cost were the final sticking point. There is no serious political observer who does not think that disclosure of the administration's $534 billion estimate would have killed the bill, at least temporarily.
This is why the apparent effort to squelch Foster is so scandalous. Reportedly, his boss, Medicare administrator Tom Scully, threatened Foster with dismissal if he communicated any information about his estimates to anyone on Capitol Hill without Scully's authorization. Needless to say, such authorization was not forthcoming, because Scully knew perfectly well that it doomed the legislation -- a high-priority White House initiative.
The administration has tried to portray this whole thing as a simple management issue. Generally speaking, career bureaucrats are not allowed to communicate with Congress officially unless through channels. However, the actuaries for Social Security and Medicare have long had a measure of independence, allowing them to give technical advice directly. Consequently, the effort to withhold estimates of the drug bill appear unusual and politically motivated to an extraordinary degree.
It looks as though Scully will be the fall guy for this scandal -- which is convenient, since he has already left government. But the larger question of White House honesty still needs to be answered.

-- Bruce Bartlett is senior fellow for the National Center for Policy Analysis. Write to him here.

Medicare's Deepening Financial Crisis: The High Price of Fiscal Irresponsibility (Draft)
by Robert E. Moffit, Ph.D., and Brian Riedl
Backgrounder #1740

March 23, 2004

Medicare, the huge government insurance program that covers 41 million seniors and disabled citizens, is facing a major financial crisis. None of this is surprising.
Rising Costs
Title I of the Medicare Prescription Drug Improvement and Modernization Act of 2003 creates a new and complex universal prescription drug entitlement. According to the latest Medicare trustees report, the Medicare hospital insurance program will be exhausted in 2019, seven years earlier than the past year's estimate.[1] But that is just the tip of the iceberg. The hospital insurance trust fund does not include the new drug entitlement, and that alone will add $8.1 trillion to the program's long-term unfunded liabilities over the next 75 years.[2]
Medicare's massive costs will result in huge tax increases. According to Medicare Trustee Thomas R. Saving, a professor of economics at Texas A&M University and senior fellow at the National Center for Policy Analysis, the Medicare program is now projected to consume:
24 percent of all federal income taxes by 2019 and
51 percent of all federal income taxes by 2042.[3]
The true cost of the drug entitlement expansion is unknown, and the trustees could be understating the real cost. When the new Medicare law was enacted in 2003, the Congressional Budget Office (CBO) estimated the 10-year cost at $395 billion. Less than three months later, the White House Office of Management and Budget (OMB) revealed that it estimated the 10-year cost at $534 billion.[4]
More recently, Richard S. Foster, Medicare's chief actuary, said, "All our estimates showed that the cost of the drug benefit, through 2013, would be in the range of $500 billion to $600 billion."[5] This is just for the next 10 years, before the baby-boom generation hits the program. All of the various government actuaries have concluded that taxpayers will likely pay far more than the initial official estimates for the first 10 years and trillions of dollars after that.
Ironically, the entire financial situation could be far worse. During the debate on the new drug entitlement, Democrats offered proposals that would have cost nearly $1 trillion in the first 10 years,[6] far in excess of anything proposed by the Administration or the congressional leadership. Many critics of the new drug program actually want a more expensive program.
Bad Drug Policy
When the new drug entitlement takes effect in 2006, seniors will pay an estimated $420 in additional drug-related premiums in the first year, plus a $250 deductible. The government would then pay 75 percent of drug costs up to $2,250. Above that amount, seniors would pay $3,600 out of pocket--the "doughnut hole"--before becoming eligible for catastrophic coverage, with the government paying 95 percent of catastrophic costs and seniors paying 5 percent. Unlike the hospitalization payments, which are drawn from dedicated taxes deposited in a trust fund, the government will pay for the drug benefit from general revenues.
In the meantime, the new Medicare law creates a prescription discount drug card, effective this year, that includes a $600 subsidy for low-income seniors. Unlike the subsidies provided for seniors under the drug entitlement, the drug card subsidies do not require an asset test for eligibility. The discount card is projected to save between 10 percent and 25 percent. For many seniors, especially poor seniors without coverage, this is an attractive program; it is also market-friendly and builds on existing private-sector entities. Remarkably, Congress has decided to kill this promising program after just two years of operation.
Thus, the drug discount card is temporary and expires in 2006, but the new drug entitlement is permanent and would take effect in 2006, accelerating the displacement of the existing drug coverage for millions of retirees, including the coverage that many seniors have today through former employers. Thus, Congress has enacted a universal government drug entitlement, setting in motion dynamics that will crowd out other alternatives.
A Better Medicare Drug Policy
Congress made a huge mistake in enacting the universal drug entitlement and should deal with the emerging financial problems of Medicare, including the prescription drug problem, as quickly as possible. Specifically, Congress should:
Delay the implementation of the universal drug entitlement scheduled for 2006. Even without a prescription drug entitlement, Medicare is facing formidable financial challenges. A range of public and private-sector health policy analysts have repeatedly warned Congress of the gravity of these challenges and have recommended serious structural changes to Medicare, such as a premium support financing system, to enable the program to deliver high-quality health care to future retirees.
In the meantime, Congress has not yet adopted a strong mechanism to cope with future entitlement costs and the unfunded liabilities that face current and future generations of taxpayers. This needs to be done before any new entitlement begins in 2006. In the face of these unmet challenges, there is no good reason for Congress to expand the Medicare entitlement, displace existing drug coverage, and accelerate the loss of drug coverage offered to retirees through former employers.
Make the drug discount card program a permanent feature of Medicare. The Centers for Medicare and Medicaid Services staff is already processing applications from over 100 companies that want to offer the drug discount cards on a regional or national basis. The infrastructure for a potentially successful program is already being established. There is no good reason to shut down the entire operation and deprive seniors of a personal choice. Indeed, the drug discount card program, combined with catastrophic coverage and even richer subsidies to low-income seniors, could be the foundation of a superior drug option for Medicare beneficiaries.
Federal subsidies to low-income seniors, or those without drug coverage, could be delivered through debit cards issued by private health plans. Any qualified health plan that provides for catastrophic coverage and meets current federal or state insurance regulations should be able to participate. Income-related subsidies could be channeled through qualified health plans. This would give Medicare beneficiaries a strong incentive to sign up for drug coverage and minimize adverse selection.
Like the entities offering the drug discount cards, the plans could be national or regional and could be required to disclose information that would allow for consumer comparisons. Consumer comparisons are routine under the Federal Employees Health Benefits Program (FEHBP), the popular and successful program used by federal employees and retirees.
Integrate the drug discount card program into the new Medicare Advantage program. Medicare beneficiaries should be allowed to continue to use the drug discount card, and the subsidies for low-income seniors should be retained or even increased. In 2006, the Medicare Advantage health plans, including new regionally based preferred provider organizations, will be available to seniors. These health plans should have the opportunity to integrate the drug discount card and low-income drug assistance programs into their health plan offerings. Unspent funds for those who are subsidized through the discount card could be rolled over tax-free from year to year, much like a health savings account.
Taxpayers face a serious financial problem in the Medicare program. As Professor Tom Saving, a Medicare public trustee, has reported, the program is projected to consume over half of all federal income taxes by 2042.[7]
Taxpayers can expect the real costs of the drug entitlement to be much greater than the initial published estimates. Worse, some Members of Congress are claiming that the current drug entitlement subsidy is not enough and want to fill the entitlement's unpopular "doughnut hole" and double the initial expenditures on the new entitlement. Such prescriptions would not only worsen Medicare's already difficult financial problems, but also pave the way for government restrictions on prescription drugs for seniors. To control costs of the drug entitlement program, the government would somehow have to limit the supply of drugs, probably through tighter drug formularies or some form of government price fixing or purchasing mechanism. Yet, with demand for prescription drugs rising rapidly, the government cannot and should not provide more by paying less.
There is a better alternative. Members of Congress should get a handle on the exploding costs of the Medicare program before implementing a universal entitlement expansion. To that end, they should at least delay implementation of the drug entitlement while making the prescription drug discount a permanent feature of Medicare, including the new Medicare Advantage system that will take effect in 2006. Such a policy could establish the foundation for a more rational and responsible Medicare drug program: one that accommodates, rather than displaces, a wide variety of private-sector drug options.
Of course, Congress can also choose to do nothing.
But nothing will be very expensive.

Robert E. Moffit, Ph.D., is Director of the Center for Health Policy Studies, and Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies, at The Heritage Foundation.

[1]Centers for Medicare and Medicaid Services, 2004 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplemental Insurance Trust Funds, March 23, 2004, p. 2, at
[2]Ibid., p. 109. The unfunded obligation over the 2003-2078 period is $8.1 trillion. The unfunded obligation over an infinite time horizon is $16.6 trillion. This year, the Medicare trustees have introduced an additional way to calculate the program's future costs and liabilities. This method, known as "infinite horizon," includes all current and future participants. Under this category, the unfunded obligation of the drug entitlement amounts to $16.6 trillion.
[3]Thomas R. Saving, "Examining the 2004 Social Security and Medicare Trustees Reports," congressional briefing on behalf of the National Center for Policy Analysis, Washington, D.C., 2004.
[4]The different cost estimates are the results of significant differences between CBO and OMB assumptions.
[5]Robert Pear, "Democrats Demand Inquiry into Charge by Medicare Officer," The New York Times, March 14, 2004.
[6]Sheryl Gay Stolberg and Robert Pear, "Mysterious Fax Adds to Intrigue over the Medicare Bill's Cost," The New York Times, March 18, 2004.
[7]Saving, "Examining the 2004 Social Security and Medicare Trustees Reports."

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All Rights Reserved.


White House, Giuliani React to Sudan's OBL Offer
The Bush White House and former New York City Mayor Rudy Giuliani reacted on Wednesday to news that President Clinton turned down an offer to arrest Osama bin Laden five years before the Sept. 11 attacks.
During an interview with White House Chief of Staff Andy Card, radio host Sean Hannity played's recording of Clinton explaining that after Sudan released bin Laden in 1996, "I did not bring him here because we had no basis on which to hold him, though we knew he wanted to commit crimes against America."
Hannity asked Card, "Doesn't that statement clearly indicate that Osama bin Laden was offered to the United States?"
The top Bush aide sounded stunned by the Clinton audio.
"You ask a very important rhetorical question and I can't answer it," said Card. "I have no knowledge [of the Sudanese offer]. When I say I have no knowledge, I don't even have knowledge that I can't tell you about."
When pressed on whether Clinton's comments indicated that the Sudanese offer was indeed real, Card told Hannity, "It would certainly be a credible reason to have that expectation."
Later during the same broadcast, Hannity shared the Clinton audio with former New York City Mayor Rudy Giuliani, who said it confirmed reports of the Sudanese offer.
"From President Clinton's answer it sounds like he was offered [bin Laden]," he told Hannity.
"It sounds like the president and the administration came to the conclusion that there was no legal basis - if we had him - to hold him, which would make him just a free person here. That seems like the former president is probably correct about that."
Giuliani continued:
"But I don't know how you'd be having those discussions if [bin Laden] wasn't offered. ... I don't know why he'd be making those decisions if there wasn't some kind of viable offer being made."
On Tuesday the 9/11 Commission said it could find no "reliable evidence" indicating that Sudan had indeed offered bin Laden to the Clinton administration.

To listen to Bill Clinton explain how he let Osama bin Laden get away, Click here.


9/11 Commission: Clinton Refused to Let CIA Kill Bin Laden
Announcing some of its preliminary findings on Wednesday, the 9/11 Commission has confirmed that President Clinton ordered the CIA to take Osama bin Laden alive or not at all - a directive that made the task of neutralizing the terrorist kingpin infinitely more difficult.
In a statement read at the beginning of Wednesday's session, 9/11 staffer Michael Hurley revealed:
"CIA senior managers, operators and lawyers uniformly said that they read the relevant authorities signed by President Clinton as instructing them to try to capture bin Laden.
"They believed that the only acceptable context for killing bin Laden was a credible capture operation. 'We always talked about how much easier it would have been to try to kill him,'" a former chief of the bin Laden station told the Commission.
"Working level CIA officers were frustrated by what they saw as the policy restraints of having to instruct their assets to mount a capture operation," the Commission statement said.
Commission staffer Hurley detailed one attempt to recruit indigenous Afghan forces in a bin Laden capture operation, explaining, "When Northern Alliance leader Massoud was briefed on the carefully worded instructions for him, the briefer recalled that Massoud laughed and said, 'You Americans are crazy. You guys never change.'"
The Commission found that at least two senior CIA officers would have objected to killing bin Laden even if Clinton had authorized the hit. "One of them, a former counterrorism center chief, said that he would have refused an order to directly kill bin Laden," the Commission statement said.
Last week NBC News quoted former CIA official Gary Schroen as saying that White House orders to spare bin Laden's life cut the chances of getting him in half, from 50 to 25 percent.
Schroen's revelation - now confirmed by the 9/11 Commission - was ignored by the mainstream press beyond its initial coverage by NBC.

China Puts Gun to Head to of U.S. Tech Companies
Dave Eberhart,
Saturday, Mar. 27, 2004
As the Wi-Fi boom takes hold around the globe, China is putting a gun to the head of U.S. chip makers -
Either turn over your patented technology - and accept our standards - or we won't allow U.S. companies to enter Chinese markets.
Wi-Fi refers to "wireless fidelity" - the ability to transmit internet and other broadband connections though wireless transmitters to computers and other wireless devices. With Wi-Fi, plugging your computer into a telephone line will be a thing of the past. And already, there's talk of Wi-Fi telephones, radio and more.
The Wi-Fi craze is taking root here in the U.S. - with "hot spots" or "Wi-Fi nodes" sprouting up in airport lounges, hotels, public parks, and even Starbucks.
Now, Chinese IT companies are poised in the wings, salivating to create computer "hotspots" at trendy Chinese airports, restaurants and the ubiquitous Starbucks -- anxious to serve a huge computer savvy populace breathless for wireless Internet connectivity (WLAN).
The bogeyman in this frenetic scene: China's Wired Authentication and Privacy Infrastructure (WAPI) security specification.
The rub: China's newly developed WAPI security spec isn't compatible with the U.S. and World 802.11 standard. A 802.11 network refers to a family of specifications developed by the IEEE for wireless LAN technology. The numeric specifies an over-the-air interface between a wireless client and a base station or between two wireless clients. The IEEE accepted the specification in 1997.
IEEE is the Institute of Electrical and Electronics Engineers, an organization composed of engineers, scientists, and students -- best known for developing standards for the computer and electronics industry. In particular, the IEEE 802 standards for local-area networks are widely followed.
Worst of all: China doesn't seem to care.
In fact, China has pulled out a .357 magnum and pointed it at the head of U.S. tech companies: China is now demanding that non-Chinese vendors must partner with one of 24 Chinese-sanctioned vendors to make any Wi-Fi products used in the People's Republic - incorporating, of course the nettlesome WAPI.
At stake: the slamming of the door on the huge Chinese IT market.
China's surprise game of hardball has much of the IT world and its cadre of pundits in a dither:
Some think that forcing the foreign companies to work with the Chinese vendors is just a WTO-dissing ruse to pump up the country's flagging economy.
Others suggest that the forced partnerships put foreign Intellectual Property rights in jeopardy. China, after all, has a bad rep in this department. While working with the foreigners to muscle in the new Chinese WAPI, the Chinese vendors will get the inside scoop on a bunch of trade secrets held by their guests' gear and spirit it away -- reprising the nation's stunt with cell phone technology in the last decade.
Conspiracy addicts suspicion that WAPI just might include a "back door" that would allow the Chinese government access to encrypted data.
Some opine that the Chinese checkers move is just the salient in a long-term move to make the Chinese WAPI the world standard, dissing long-standing entities such as IEEE and the Wi-Fi Alliance.
The Wi-Fi Alliance is an organization made up of leading wireless equipment and software providers with the missions of certifying all 802.11-based products for interoperability and promoting the term Wi-Fi as the global brand name across all markets for any 802.11-based wireless LAN products.
And the biggest fear: Chinese companies will use Western Wi-Fi technology to build the expertise needed to grab a big share of the growing market for chips in China. So far, the budding Chinese IT industry is benignly churning out low-end semiconductors, including commodity memory chips, for relatively simple goods. No one, save for the Chinese, is anxious to see that happy situation change.
Not so to all-of-the-above, argue the Chinese, who suggest that they are only interested in security. The present World standards are at best second-rate, they say, and need to be abridged (particularly to quell the national paranoia in all things relating to security).
Between a Rock and a Hard Place
In any event, all this brouhaha has put the leading foreign manufacturers between a rock and a hard place.
Everyone would like to humor the hugely profitable customer. The customer, after all, is always right. However, the rock at one end is that tech companies don't want to give away trade secrets that will eventually grow low-cost rivals. And the hard place is that if they spurn China's demands, they risk being frozen out of a fast-growing market.
Dilemma or no, Intel Corp. has tossed down the gauntlet, announcing that it won't ship any Wi-Fi chips to China after May of this year. It seems that Intel's Centrino integrates a Wi-Fi transmitter with a microprocessor. That unhappy fact -- for reasons at best vague to the technically-disadvantaged -- makes it a cinch that the U.S. giant would have to cough-up key know-how to finagle the Chinese standard WAPI thingamajig to work in its own gear.
No one to dis a big client, Intel has eschewed any reference to the shopping list of colorful charges above, revealing only that the use of the WAPI gadget would undermine the quality standards of its products and that the technical challenges of converting to WAPI were too great to meet the deadline of June 1.
Chip maker Broadcom has also come out as against the WAPI mandate. They will also stop selling Wi-Fi chips to China - also starting in May.
But there is hardly a united front. Competitors Atheros and Texas Instruments are going to go ahead full bore with full support for WAPI.
Enter the Mysterious `ARM core'
Jason Tsai, senior manager for the Connectivity Products Division at Taiwan-based Silicon Integrated Systems, has signaled his company's malleability to the mandate:
"In our design, we can move in two directions -- modify the hardware architecture as soon as possible" or "try to implement an ARM core into the chip to have the flexibility to modify the firmware to fit the WAPI spec."
"Firmware" or not, some out there in IT-land are still hoping for some kind of compromise to break the logjam. After all, some argue, chipmakers have already agreed upon improved international standards to address many of the Wi-Fi security issues China raises.
Perhaps China, a relatively new member of the World Trade Organization, will buckle under the pressure coming from those who maintain that Beijing's policy violates WTO rules. Some of the fine print in those rules, for instance, says that governments are not allowed to treat foreign companies differently from domestic ones.
Ann Rollins, director of technology and trade policy at industry lobby group ITI sees it this way:
"China is a new member of the WTO. And the people that developed the standard don't quite understand that there are principles and obligations to uphold."

Posted by maximpost at 9:45 PM EST
Friday, 26 March 2004

FBI denies link between terrorists, LNG tankers
By Shelley Murphy and Stephen Kurkjian, Globe Staff, 3/26/2004
FBI officials vehemently denied yesterday recent assertions by former White House terrorism czar Richard A. Clarke that the FBI learned in December 1999 that terrorists had been slipping into Boston on liquefied natural gas tankers from Algeria, yet failed to notify local authorities.
``We did thoroughly investigate that LNG tanker situation and came to the conclusion they were not being used to transport terrorists into our country,'' said Kenneth Kaiser, the special agentin-charge of the FBI's Boston office. ``We didn't brief the mayor that there was an Al Qaeda cell here, because there wasn't one.''
According to Kaiser, the FBI was investigating the thwarted 1999 ``millennium'' plot to blow up Los Angeles International Airport when it learned that several people being questioned in Boston had entered the country by stowing away on LNG tankers from Algeria.
The Joint Terrorism Task Force, which includes members from the Boston police and the Massachusetts State Police, conducted an intensive investigation and concluded that none of the stowaways were terrorists, Kaiser said.
``There were none that had any links to terrorism that we could find and none that committed any acts of terrorism,'' Kaiser said. Ultimately, the cases in Boston were turned over to the US Immigration andNaturalization Service to determine whether the men should be deported, he said. Kaiser said he did not know if anyone had been deported.
While one of the men who was later convicted in the millennium plot, Abdelghani Meskini, had arrived in Boston as a stowaway on an Algerian tanker, Kaiser said there was no evidence that Meskini, who is cooperating with authorities and denies being a terrorist, had any terrorist links when he arrived in Boston in January 1995. He was living in Brooklyn, N.Y., when he was arrested in December 1999 in connection with the millennium plot.
Clarke, who left his post with the White House last March, says in his new book, ``Against All Enemies,'' that the FBI learned in December 1999 that Al Qaeda suspects had entered the United States onLNGtankers that dock at the DistriGas port in Everett. Yesterday, he said that information should have been shared with State Police officials and the governor.
``The governor and his authorities should have been informed, and frankly I don't know why the FBI didn't make that happen,'' Clarke said yesterday in an interview on WRKO radio. ``The FBI has channels for notifying state and local law enforcement officials when it finds out things in their jurisdictions, and the FBI definitely should have told the State Police.''
Clarke's comments were his first public remarks on the issue of LNG safety in Boston Harbor. Local officials and the company that runs the LNG facility, Distrigas of Massachusetts, said they were unaware of possible terrorist infiltration of LNG tankers until Clarke's book was published.
But Kaiser said that Clarke's assertions were based on ``incomplete information,'' because he had received a briefing on the FBI's investigation into the LNG tankers when it was ongoing and he apparently didn't know that the FBI had concluded that terrorists weren't jumping ship in Boston.
Tom Powers, an assistant special-agent-in-charge who heads the FBI's counterterrorism efforts in Boston, said he personally gave Clarke a briefing on the case on June 23, 2000, when Clarke was traveling to FBI offices around the country for updates on their efforts to fight terrorism.
``I don't believe those tankers were ever used up to 9/11 as a deliberate attempt to seed terrorism in the United States,'' Powers said.
US Representative Edward J. Markey, whose district includes Everett, said he would continue to push for documentation that backs up the FBI's statements, noting that President Bush's aides are working hard to shoot down claims made by Clarke. He said he has been asking federal officials for information on terrorist threats to the LNG facility since shortly after Sept. 11, 2001. Mayor Thomas M. Menino said he doesn't believe the issue of possible terrorists arriving as stowaways on tankers was ever mentioned to Boston police officials.
Kaiser said Boston police officials were briefed on the LNG tanker investigation at the time, and said it's customary to brief the Boston police commissioner, rather than go directly to the mayor. Everett Police Chief Stephen A. Mazzie said he believes that ``dozens'' of Algerians arrived in Boston by stowing away on an LNG tanker, the Mostefa Ben Boulaid, which made monthly trips from Arzew, an Algerian port city in North Africa.
Mazzie said, however, that he investigated the backgrounds of many of the Algerians after they were charged with minor crimes, but that none were involved in violent crimes, guns, or bomb-making.
But because they were in the country illegally, Mazzie said he contacted the INS. ``What I got back was that there was nothing [the INS] could do unless it involved a felony or crime of violence,'' Mazzie said.
Mazzie and Chelsea Police Chief Frank Garvin said that the FBI and other federal agencies were so concerned about security at the Everett facility that they boarded vessels to check for illegal contraband and review the crew's identification papers.
``We thought we had any problems under control,'' Garvin said
Tuesday, ``which is why everyone was so surprised to read that there might have been a terrorist threat among the stowaways on the boat.''
A Distrigas statement said that the company stopped accepting Algerian vessels months before the attacks of 9/11.
Rick Klein of the Globe staff contributed to this report.

? Copyright 2004 Globe Newspaper Company.
FBI chief talks of election-year terrorism risks
By Curt Anderson, Associated Press, 3/26/2004
WASHINGTON -- Terrorists could attempt to influence the outcome of this year's US presidential election by launching attacks in America and overseas, FBI Director Robert Mueller said yesterday.
In an interview, Mueller also said Islamic extremists have changed tactics and are focusing on recruiting local sympathizers who are less likely to arouse suspicion than outsiders sent into a country to conduct terrorist operations.
The March 11 train bombings in Madrid, which were a factor in the ouster of a pro-US Spanish government, could embolden Al Qaeda or other extremists to attack the United States during this summer's presidential nominating conventions in New York and Boston, Mueller said.
"In the wake of what happened in Madrid, we have to be concerned about the possibility of terrorists attempting to influence elections in the United States by committing a terrorist act," Mueller said.
Those conventions will book-end the Summer Olympics in Athens, another venue that could draw terrorist attacks. The United States has been concerned that security efforts in Athens may fall short of what is necessary to protect athletes and spectators.
"We understand that between now and the election, there is a window of time in which terrorists might try to influence events, whether it's here or overseas," Mueller said. The FBI and other US agencies are assisting the Greeks to identify and shore up potential weaknesses.
Regarding the new Al Qaeda recruiting tactics, Mueller said that the suicide bombers who took part in last May's attacks in Casablanca, Morocco, were local extremists, and he indicated that similar efforts are probably going on in the United States.
Mueller applauded the cooperation of Saudi Arabia and Pakistan in US antiterrorism efforts. Since the deadly May 12 bombings in Riyadh, Saudi Arabia has moved aggressively to root out Al Qaeda cells and discovered huge caches of explosives and weapons.
"Saudi Arabia has become a very inhospitable place for Al Qaeda," Mueller said. "That was not always the case."
Separately, the FBI yesterday said it had given Texas oil refiners a new warning about possible terror attacks coinciding with US elections in November, but reaction from the industry and world oil markets was muted. The advisory was based on "very raw intelligence" from overseas sources, said Bob Doguim, spokesman for the Houston FBI office.

? Copyright 2004 Globe Newspaper Company.

Tax cut is part of Kerry plan
By Jim VandeHei, Washington Post, 3/26/2004
WASHINGTON -- John F. Kerry today will propose a 5 percent cut in the corporate tax rate as part of a new economic plan designed to create 10 million jobs by 2009 and discourage companies from sheltering taxable income overseas, his economic advisers said yesterday.
In essence, Kerry will offer a trade: If elected president, he would cut taxes on US corporations if they accept the elimination of tax benefits for those firms that move overseas.
The Massachusetts senator, fresh from a week's vacation, plans to use his first domestic policy address of the general election campaign to call for this carrot-and-stick approach to prod US companies to do more business and create more jobs in America. The speech is billed as the first of three presenting Kerry's detailed balanced budget plan, which will include several new tax cuts.
In doing so, Kerry is seeking to position himself as a moderate, probusiness Democrat similar to Bill Clinton in the 1990s and beat back charges he is a liberal tax-and-spend politician.
The Kerry offensive illustrates the centrality of economic issues in the 2004 election. As Kerry's economic team was rolling out the new plan, President Bush was airing a new TV ad, accusing Kerry of supporting tax hikes on Social Security recipients and gas and touting his own "optimistic" economic vision in a different ad and in New Hampshire.
In today's speech at Michigan's Wayne State University, Kerry will reiterate his call for the elimination of all tax breaks that encourage US companies to locate operations and jobs overseas and close all international tax loopholes. For the first time, he will target a popular tax incentive, known as "deferral," offered to most US companies that do business in lower-taxed foreign countries.
To soften the blow to corporations, Kerry will propose a one-time, one-year offer to tax at 10 percent any profits a company brings back to the United States and invests here; an expanded tax credit to companies that create domestic jobs and a reduction in the corporate tax rate to 33.25 percent from 35 percent.
"The most salient feature, or at least symbolic feature, is the corporate tax rate [cut]," said Roger Altman, a top economic adviser to Kerry. "When is the last time you saw a Democrat propose a corporate tax cut?"
Gene Sperling, another Kerry economic adviser, said the tax cuts for business will be fully funded by the international tax changes.
But Bruce Josten of the US Chamber of Commerce said the Kerry plan seems to ignore the complexity of the global economy. "There is a broader point he completely misses: there are companies that open up overseas" for reasons other than tax avoidance, he said.
By coupling new tax breaks with what amount to a new tax hike if loopholes are closed, Kerry is following Clinton's economic -- and political -- blueprint. In 1993, Clinton and congressional Democrats offered a mix of tax cuts and increases as the centerpiece of an economic plan that they say helped set the stage for the booming 1990s. Altman and Sperling worked for Clinton.

? Copyright 2004 Globe Newspaper Company.

US details war plan's success and failings
By Bryan Bender, Globe Staff, 3/26/2004
WASHINGTON -- The American blitz into Baghdad was a stunning military success, but the war plan failed to adequately address the need to secure "sensitive sites" such as suspected weapons facilities, government archives, and possible terrorist hide-outs, according to a draft of the Pentagon's self-assessment of the military's performance in Iraq.
The draft report said that not enough properly trained units were available in the early weeks of the operation to take over sites where weapons of mass destruction were suspected, even though much of the war plan was predicated on the idea that Iraq might retaliate with unconventional weapons.
Overall, the unclassified version of the "lessons learned" report concluded that the successful US-led invasion proved the effectiveness of smaller, high-tech units deployed quickly over large expanses -- the prime thrust of Defense Secretary Donald H. Rumsfeld's efforts to "transform" the military.
No longer are large formations critical to victory when small, flexible units linked with precision weaponry and high-tech communications can overwhelm a conventional military enemy by attacking its political, military, economic, and social centers, according to the draft report, which was obtained by the Globe.
"The traditional view of military forces wearing similar uniforms, arrayed on a linear battlefield, fighting mass formations, began to give way [in Iraq] to a different style of war-fighting," the report said. "Smaller formations with fluid and flexible command-and-control relationships, using lethal and nonlethal capabilities, fought to directly influence political, military, social, economic, information, and infrastructure objectives."
The report, dated March 1, is the first comprehensive Pentagon assessment of the invasion. Its existence was first reported by Inside the Pentagon, a newsletter covering the US military and the defense industry. A final version is expected to be released to the public in the coming weeks. The draft warned that the campaign that toppled Saddam Hussein in three weeks should not be used as a model for all future wars: Iraq, which had been a heavy focus of US military and intelligence officers at least since the 1991 Persian Gulf War, provided unique advantages for the United States from the outset that are unlikely to recur.
The 128-page report, which covers the period from March 21 to May 1, 2003, when President Bush declared an end to "major combat operations," was commissioned by the Joint Chiefs of Staff before the war and compiled by 34 military officers and 23 civilians at the US Joint Forces Command in Norfolk, Va., who were dispatched to Iraq at the start of the war to track how the military branches coordinated operations.
The draft provides a highly technical assessment of the gamut of military activities, from prewar planning to intelligence and logistics. It highlights a series of deficiencies, including the inability of US and allied forces to identify each other on the battlefield and prevent friendly fire; difficulties in providing supplies to forces that were rapidly on the move; the limited ability to track Iraqi military forces as they dispersed; and inadequate preparations before the war to equip National Guard and other reserve forces to take on a significant role. The draft said the preparations for seizing weapons of mass destruction facilities and other sites in Iraq -- missions conducted by Sensitive Site Exploration Teams, or SSEs -- were inadequate.
"Multiple SSE organizations were created with overlapping missions," it said. "This caused unnecessary competition for limited resources and reduced the effectiveness of all the groups."
Commanders chose an artillery unit, the 75th Artillery Brigade, to take control of sites with suspected weapons of mass destruction, even though it had virtually no experience or training for the mission. The brigade's mission soon expanded to include searches for Iraqi archives, war crimes evidence, terrorist hide-outs, regime leaders, and prisons.
The brigade was improperly trained for these missions, which were "far from the one for which it was designed," said the report.
No weapons of mass destruction have been found in Iraq, even though the military created a special survey group to lead the search after the combat phase.
Other key findings in the report include:
The intense, hand-to-hand combat expected in urban areas never materialized, so "our ability to conduct this sort of fight is not yet proven."
Some Iraqi troops evaded intelligence gathering, exploited adverse weather such as sandstorms to disperse, and have not been caught yet.
The military did little since the Gulf War to improve coordination to prevent deaths from friendly fire. For instance, ground forces had seven different "combat identification systems" and no way to identify one another. A Patriot missile shot down a British fighter plane, killing its crew.
The report praised the policy of "embedding" media with American combat units: "Public access to the battlefield through media proved to be a significant and overall positive component."
Overall, the assessment depicts a highly successful effort that employed many of the advances in military science of the past decade. The United States used about half of troops it employed in the Gulf War to envelop all of Iraq, not merely evict Iraqi forces from Kuwait as US forces did in the Gulf War. It used 15 percent of the munitions it used in 1991, although both wars lasted about the same amount of time.
"The terms historically used for measuring success in conflict are now less meaningful," the report said. "Forces are moved, operated, and sustained in a way that focuses more on generating effects than quantifying space occupied."
Indeed, special forces, on the order of 10,000, were twice the number that served in the 1991 war and more than three times larger as a proportion of the whole force engaged in combat. The small, elite units were able to take control of half of Iraq and almost single-handedly bottled up 11 Iraqi divisions.
Still, the report cautioned that Operation Iraqi Freedom could be a poor model for future fights. Iraq had 30 percent of the ground forces and 25 percent of the aircraft that it had in 1991, along with 60 percent of the air defenses. US Central Command had more than a decade of "corporate memory" of Iraqi miltary capability to prepare for the onslaught.
"Before the beginning of major combat . . . the United States continued to enforce the no-fly zones in northern and southern Iraq," the report said. "Additionally, these operations had been used to shape the battle space for the upcoming conflict. This extensive shaping affected how much effort was needed during the combat phase."
In the future, it concluded, the military is "not likely to have the same levels of experience or the time during a crisis to build the types of cohesive teams that marked CENTCOM's success."

? Copyright 2004 Globe Newspaper Company.

Syria seeks our help to woo US
By John Kerin
March 27, 2004
SYRIA has appealed to Australia to use its close ties with Washington to help the Arab nation shake off its reputation as a terrorist haven and repair its relations with the US.
Secret talks between the two nations have been under way for months but have become more urgent as rogue nations reconsider their role in allowing terrorists to thrive, in light of the US determination to take pre-emptive military action.
A Syrian embassy will be opened in Canberra in weeks and Australia is considering reopening its mission in Damascus.
Australia's close relationship with Washington, and its much higher profile in the Middle East, have prompted Syrian Foreign Minister Farouq al-Shara'a and parliamentary speaker Mahmoud Al-Ibrache to appeal to Canberra to help bring their country back in from a US-imposed diplomatic freeze.
Syria has sent a delegation to Australia and has hosted a series of visits by Australian parliamentarians.
Drawing on the British-sponsored return of Libya to the international fold, Australia is demanding that Syria take a tougher role against terrorists, particularly those using the nation as a base for operations into Iraq.
Australia also has called on the former Soviet client state to abandon any pursuit of weapons of mass destruction before it returns to the fold.
Syria has supported the war on terror but the Bush administration has been sceptical about its commitment, fearing Iraqi weapons of mass destruction were smuggled across the border before the US-led invasion last year.
In November, senior Syrian officials asked a bipartisan Australian delegation led by National Party senator Sandy Macdonald to use Australia's influence with the US to achieve a diplomatic rapprochement.
Senator Macdonald said yesterday: "Syria is a country that has been a bastard state for nearly 40 years. But the leaders we spoke to in Syria appear keen to make linkages with the West and it sees Australia as having influence in Washington."
The overtures to Syria are seen as a response to the West's determination to confront rogue nations that may either pose a threat themselves or pass on weapons to terrorists.
Foreign Minister Alexander Downer last night welcomed Syria's commitment to broadening dialogue with the international community.
"We would like to see Syria follow Libya's example in making a genuine return to the international community," he said through a spokesman.
"But Syria must abandon any effort to attain weapons of mass destruction, act to control the flow of terrorists across its border with Iraq and step up support for the war on terror."
He said Australia was considering reopening an embassy in the Syrian capital, Damascus. The embassy was closed in 1999 because of cost-cutting.
Syria's Melbourne-based honorary consul, Antonios Zyrabi, confirmed to The Weekend Australian last night that Syria wanted Australia to help it come in from the diplomatic cold.

? The Australian

Posted by maximpost at 1:55 PM EST
Thursday, 25 March 2004


Press Release:
Plundering politicians and bribing multinationals undermine economic development, says TI

Transparency International's new Global Corruption Report 2004 charts the flow of stolen assets, recommends ways to recover money looted by despots, and sets out new Standards on Political Finance and Favours

London, 25 March 2004

Political corruption undermines the hopes for prosperity and stability of developing countries, and damages the global economy," said Peter Eigen, Chairman of Transparency International (TI), launching the TI Global Corruption Report 2004 (GCR 2004 ) today. "The abuse of political power for private gain deprives the most needy of vital public services, creating a level of despair that breeds conflict and violence. It also hits the pockets of taxpayers and shareholders worldwide. The problem must be tackled at the national and international level," he said.

"The GCR 2004 , with a special focus on political corruption," said Eigen, "is a call to action to bring integrity and accountability into governance, to stop bribery by multinational companies, and to curb the flow of stolen assets into secret bank accounts in the west." TI is the leading international non-governmental organisation combating corruption worldwide.

"Democracies can no longer tolerate bribery, fraud and dishonesty," states former US President Jimmy Carter in a foreword to the GCR 2004 , "especially as such practices disproportionately hurt the poor."

The GCR 2004 details funds allegedly embezzled by political leaders of the past two decades. During his misrule, Mohamed Suharto, President of Indonesia from 1967-98, is alleged to have stolen US$15-US$35 billion in a country where the GDP per capita hovers at around US$700. Suharto tops the table of corrupt politicians.

Where did the money go? - The top 10

Head of government Estimates of funds allegedly embezzled GDP per capita (2001)
1. Mohamed Suharto President of Indonesia, 1967-98 US$ 15 to 35 billion US$ 695
2. Ferdinand Marcos President of the Philippines, 1972-86 US$ 5 to 10 billion US$ 912
3. Mobutu Sese Seko President of Zaire, 1965-97 US$ 5 billion US$ 99
4. Sani Abacha President of Nigeria, 1993-98 US$ 2 to 5 billion US$ 319
5. Slobodan Milosevic President of Serbia/Yugoslavia, 1989-2000 US$ 1 billion n/a
6. Jean-Claude Duvalier President of Haiti, 1971-86 US$ 300 to 800 million US$ 460
7. Alberto Fujimori President of Peru, 1990-2000 US$ 600 million US$ 2,051
8. Pavlo Lazarenko Prime Minister of Ukraine, 1996-97 US$ 114 to 200 million US$ 766
9. Arnoldo Alem?n President of Nicaragua, 1997-2002 US$ 100 million US$ 490
10. Joseph Estrada President of the Philippines, 1998-2001 US$ 78 to 80 million US$ 912

Transparency International Standards on Political Finance and Favours

1. Donations to political parties and candidates to elected office must not be a means to gain personal or policy favours. Parties and candidates must practise transparency. Governments must implement adequate conflict-of-interest legislation.

2. Political parties, candidates and politicians should disclose detailed information about assets, donations, in-kind donations, loans and expenditure, on an annual basis as well as before and after elections, to an independent agency.

3. Independent public oversight bodies endowed with the necessary resources must effectively supervise the observance of regulatory laws and measures. Together with independent courts, they must ensure that offenders are held accountable and duly sanctioned. 4. Diversified funding should be sought through: state funding and subsidised access to the media; the encouragement of small donations and membership fees; and controls on corporate, foreign and large individual donations. Spending limits should be considered.

5. Candidates and parties must be given fair access to the media. The media should play an independent role, free from political interference, both in election campaigns and in the broader political process.

6. Civil society should have the opportunity to actively participate in promoting adequate legislation in the field of political finance and in the monitoring of political finance and its impact on political representation.

The full text of the TI Standards is available in the TI Global Corruption Report 2004

Part one
Political corruption
TI 02 chap01 7/1/04 11:39 Page 9
TI 02 chap01 7/1/04 11:39 Page 10
1 Introduction
Robin Hodess1
What is political corruption?
Political corruption is the abuse of entrusted power by political leaders for private gain,
with the objective of increasing power or wealth.2 Political corruption need not involve
money changing hands; it may take the form of `trading in influence' or granting
favours that poison politics and threaten democracy.
Political corruption involves a wide range of crimes and illicit acts committed by
political leaders before, during and after leaving office. It is distinct from petty or
bureaucratic corruption in so far as it is perpetrated by political leaders or elected
officials who have been vested with public authority and who bear the responsibility
of representing the public interest. There is also a supply side to political corruption -
the bribes paid to politicians - that must be addressed.
Political corruption is an obstacle to transparency in public life. In established
democracies, the loss of faith in politics and lack of trust in politicians and parties
challenge democratic values, a trend that has deepened with the exposure of corruption
in the past decade.3 In transition and developing states, political corruption threatens
the very viability of democracy, as it makes the newer institutions of democracy
Political corruption is a primary focus of Transparency International's work. Indeed,
one reason for selecting political corruption as the theme of this year's Global Corruption
Report is the priority of this issue in TI's network of national chapters around the world,
many of which hold political corruption to be a major concern in their country and
have made political corruption a focus of their advocacy efforts.
The impact of political corruption
The revelation of political corruption often sends shockwaves through a society. Yet,
despite strong demands for justice, prominent world leaders who are suspected of
corruption prove difficult to prosecute or convict. Many leaders are out of office or dead
before their crimes come to light. TI has put together a list of alleged embezzlers from
Sani Abacha to Mohamed Suharto (see Table 1.1, page 13), showing estimates of the
money they allegedly stole as compared with per capita income. This list is a powerful
reminder of just how massive and devastating the scale of abuse can be.
Introduction 11
TI 02 chap01 7/1/04 11:39 Page 11
The general public around the world has taken note of political corruption. TI's
Global Corruption Barometer (see `Global Corruption Barometer 2003', Chapter 11,
page 288), a new instrument that assesses the general public's experiences of and
attitudes towards corruption, finds that if citizens could wave a magic wand to eliminate
corruption from just one institution, more would choose to clean up political parties
than any other institution. For parties, which play a crucial role in public life in any
democracy, the message is clear: there must be absolute probity of party members and
officials, and parties themselves must clean up their internal practices.
Business people also sense the effects of political corruption. A survey by the World
Economic Forum shows that business people believe that legal donations have a high
impact on politics, that bribery does feature as a regular means of achieving policy
goals in about 20 per cent of countries surveyed, and that illegal political contributions
are standard practice in nearly half of all countries surveyed (see Box 2.4, `Political
corruption: a global comparison', page 30).
Political corruption points to a lack of transparency, but also to related concerns
about equity and justice: corruption feeds the wrongs that deny human rights and
prevent human needs from being met. Former UN High Commissioner for Human
Rights Mary Robinson argues that corruption hinders participation in political life and
proper access to justice (see box `Corruption and human rights', page 7).
Focus of the report
This year's Global Corruption Report focuses on corruption in the political process, and
on the insidious impact of corrupt politics on public life in societies across the globe.
It addresses the following areas in the context of political corruption:
* the regulation of political finance
* the disclosure of money flows in politics and the enforcement of political finance
* elections - specifically vote buying
* the private sector - with a focus on the arms and oil sectors, and
* tackling the abuse of office - including reducing conflicts of interest, limiting
recourse to immunity, pursuing extradition and repatriating stolen wealth.
The report also evaluates various mechanisms that can curb corruption in politics,
from citizen action to the creation of new international norms and standards, such as
Transparency International's Standards on Political Finance and Favours (see below).
By focusing on the above topics, the Global Corruption Report addresses particular
weak spots in political life: the abuse of money in the political system by candidates
and political officials; the lack of transparency about money flows in politics; the
potential of the private sector to purchase influence, distorting both the marketplace
and the fair representation of the public interest; the corruption of the electoral process;
and the ways the legal system can affect the ability of states to pursue justice in major
corruption crimes.
Political corruption 12
TI 02 chap01 7/1/04 11:39 Page 12
We chose these areas for a number of reasons. First, the prominence we give to
political finance (whether campaign finance or political party finance) reflects the
fact that often political corruption starts here, with financing. There is a great deal of
concern about the cost of elections in both new and established democracies as well
Introduction 13
Box 1.1: Where did the money go?
Table 1.1 illustrates the scale of the problem of alleged political corruption through
estimates of the funds allegedly embezzled by some of the most notorious leaders of the
last 20 years. To put the figures in context, the right-hand column gives the GDP per capita
of each country.
The 10 leaders in the table are not necessarily the 10 most corrupt leaders of the period
and the estimates of funds allegedly embezzled are extremely approximate. The table is
drawn from respected and widely available sources. In general, very little is known about
the amounts allegedly embezzled by many leaders.
Table 1.1
Head of Estimates of funds GDP per
government allegedly embezzled capita
Mohamed Suharto President of Indonesia, 1967-98 US $ 15 to 35 billion US $ 695
Ferdinand Marcos President of Philippines, 1972-86 US $ 5 to 10 billion US $ 912
Mobutu Sese Seko President of Zaire, 1965-97 US $ 5 billion US $ 99
Sani Abacha President of Nigeria, 1993-98 US $ 2 to 5 billion US $ 319
Slobodan Milosevic President of Serbia/Yugoslavia,
1989-2000 US $ 1 billion n/a
Jean-Claude Duvalier President of Haiti, 1971-86 US $ 300 to 800 million US $ 460
Alberto Fujimori President of Peru, 1990-2000 US $ 600 million US $ 2,051
Pavlo Lazarenko Prime Minister of Ukraine, 1996-97 US $ 114 to 200 million US $ 766
Arnoldo Alem?n President of Nicaragua, 1997-2002 US $ 100 million US $ 490
Joseph Estrada President of Philippines, 1998-2001 US $ 78 to 80 million US $ 912
GDP figures: UN Human Development Report 2003 (New York: Oxford University Press, 2003); IMF Country Report
No. 02/269 (2002).
Suharto: Time Asia, 24 May 1999; Inter Press, 24 June 2003.
Marcos: CNN, February 1998; Time Asia, 24 May 1999; UN Office on Drugs and Crime (UNODC), Anti-Corruption
Toolkit, version 5, available at
Mobutu: UN General Assembly, `Global Study on the Transfer of Funds of Illicit Origin, Especially Funds Derived
from Acts of Corruption', November 2002; Time Asia, 24 May 1999.
Abacha: UNODC, Anti-Corruption Toolkit; BBC News (Britain), 4 September 2000; see also `Repatriation of looted
state assets', Chapter 6, page 100.
Milosevic: Associated Press, 2 December 2000.
Duvalier: Robert Heinl, Nancy Heinl and Michael Heinl, Written in Blood: The Story of the Haitian People 1492-1995
(Lanham: University Press of America, 1996); Time Asia, 24 May 1999; UNODC, Anti-Corruption Toolkit; L'Humanit?
(France), 11 May 1999.
Fujimori: Office of the Special State Attorney for the Montesinos/Fujimori case, Peru.
Lazarenko: Financial Times (Britain), 14 May 2003; Chicago Tribune (United States), 9 June 2003.
Alem?n: BBC News (Britain), 10 September 2002.
Estrada: CNN, 22 April 2001; Inter Press, 24 June 2003.
TI 02 chap01 7/1/04 11:39 Page 13
as about the influence of private money on political outcomes and the lack of public
information on the real sources of political funding.
In looking at corrupt forms of political finance, we demystify the topic (see Table
2.1, `Major types of political finance-related corruption', page 20) and expose the legal
and systemic obstacles to cleaning up political finance. Our report presents the pros
and cons of bans, limits, disclosure rules and public funding as remedies to corruption
in political finance - and provides evidence from a number of countries where these
measures are in place.
We then feature one remedy to corrupt political finance - disclosure - that is central
to the philosophy and approach of Transparency International. Disclosure of the flow
of money in politics, whether financing parties or candidates or spent on elections or
on public contracting, is critical. Political finance needs to be accounted for and, above
all, clean. There is very little justification for anything but maximum transparency
about political funds. This emphasis on disclosure tends to be a point of consensus for
politicians and activists alike. Yet the reality of disclosure rules, and their enforcement,
tells a different story - one in which there are numerous ways to limit disclosure.
Enforcement is the linchpin of a successful political finance regime: even the best
laws are valuable only if they are enforced. In nearly every country, enforcement has
proved perhaps the most difficult element to realise in a framework designed to stop
political corruption. Effective enforcement requires appropriate powers of investigation
on the part of the agencies involved, an independent and competent judiciary as well
as the necessary political will. We include reports that look at enforcement in practice,
via various types of sanctions, providing a sense of what works and why.
In addition to evaluating rules for candidates, parties and governments, we also assess
what role the private sector plays in political corruption. We feature experts on the
arms and oil sectors who evaluate recent revelations of political corruption with an eye
to what made corruption possible. We endeavour to analyse current reforms of business
practices, particularly those pursued as a result of civil society efforts.
Political corruption is not limited to political finance. We use this special section
to consider a form of political corruption that affects the election process the world
over: vote buying. Our contributors assess why and how vote buying occurs and how
it changes not only elections and their outcomes, but also the relationship between
elected officials and voters. As a number of other institutions are dedicated to the
assessment of practices such as the rigging of ballots, we decided to focus on vote
buying, a corrupt political practice that has received less systematic analysis.4
To complete this special section, we sought to capture how justice is often difficult
to pursue. Contributors reflect on the use (and abuse) of immunity and laws on conflict
of interest, obstacles to repatriation and the cumbersome process of returning stolen
public assets. In all of the above, contributions focus on the legal hurdles faced by
prosecutors and populations in many alleged crimes of political corruption. They also
detail the way forces of change are emerging at both the international and national levels.
Throughout the section on political corruption, we feature Transparency
International's 2003 Integrity Awards winners. Many of these individuals - some of whom
paid for their integrity with their lives - demonstrate that it is possible to fight the system,
Political corruption 14
TI 02 chap01 7/1/04 11:39 Page 14
to stand up to political corruption and to demand an end to the damage it causes to
all people.
`Corruption. Moral decay. Political parties. Opportunism.'
Rac, Panama
Transparency International: shining a spotlight on political corruption
Political corruption can elicit a number of responses. One is voter apathy, accompanied
by public disillusionment with democracy and its capacity to limit corruption. Another
response, the one we at Transparency International aim to capture in our report, is
the ignition of citizen action - and, in some cases, positive government and private
sector measures.
How can society address the issue of political corruption? One answer, which builds
on an idea presented in the Global Corruption Report 2001, is to set standards of probity
in political finance.5 This volume introduces Transparency International's own Standards
on Political Finance and Favours (see Box 1.2, page 16), which can serve as benchmarks
for policy-makers and activists, to be adapted to national (or local) settings. They provide
a normative framework. TI's Standards go further than many of those currently available,
as they include civil society's critical role in monitoring political transparency.6
Political leaders, elected by the public and vested with the power to shape public
life, owe it to citizens to set better standards regarding their use of money, and their
conduct, both in and out of office.
Transparency International will continue to speak out against political corruption
- and will remain resolute in its commitment to greater transparency in the political
process. TI's Standards on Political Finance and Favours are one aspect of our global
advocacy efforts, which also include the following aims:
* The ratification and enforcement of the UN Convention against Corruption.
TI will monitor the ratification and enforcement of the convention, encouraging each
signatory to adopt and apply national legislation that complies with the convention.
The convention requires ratification by 30 countries before coming into effect.
Introduction 15
TI 02 chap01 7/1/04 11:39 Page 15
Political corruption 16
Box 1.2: Transparency International's Standards on Political Finance and Favours
The TI Standards on Political Finance and Favours are based on the values of integrity, equity,
transparency and accountability. They arise out of concern about the influence of money and
favours in politics, which undermines democratic processes and the rule of law. They are
presented against the background of an international commitment to countering corruption
expressed in the UN Convention against Corruption, at this writing due to be adopted in
December 2003, and they are anchored in the global recognition of human rights endorsed
in the Universal Declaration and related conventions.
1. Curbing influence peddling and conflicts of interest
Donations to political parties, candidates and elected officials should not be a means
to gain personal or policy favours or buy access to politicians or civil servants. Parties
and candidates must themselves practise transparency and demonstrate commitment
to ethical standards in public life. Governments must implement adequate conflict of
interest legislation, including laws that regulate the circumstances under which an
elected official may hold a position in the private sector or a state-owned company.
2. Transparency through disclosure and publication
Political parties, candidates and politicians should disclose assets, income and
expenditure to an independent agency. Such information should be presented in a
timely fashion, on an annual basis, but particularly before and after elections. It should
list donors and the amount of their donations, including in-kind contributions and
loans, and should also list destinations of expenditure. The information should, subject
to consideration of demonstrable security risks to donors or recipients, be made
publicly available in a timely manner so that the public can take account of it prior to
Furthermore, publicly held companies should be required to list all donations to
political parties in any country in their annual reports to shareholders and consideration
should be given to requiring shareholder approval for such donations.
3. Effectiveness in the enforcement and supervision of regulatory measures
Public oversight bodies must effectively supervise the observance of regulatory laws
and measures. To this end, they must be endowed with the necessary resources, skills,
independence and powers of investigation. Together with independent courts, they
must ensure that offenders be held accountable and that they be duly sanctioned.
The funding of political parties with illegal sources should be criminalised.
4. Diversity of income and spending limits
Careful consideration should be given to the benefits of state funding of parties and
candidates and to the encouragement of citizens' participation through small donations
and membership fees. Consideration should also be given to limiting corporate and
foreign support, as well as large individual donations.
To control the demand for political financing, mechanisms such as spending limits
and subsidised access to the media should be considered.

TI 02 chap01 7/1/04 11:39 Page 16
TI is particularly concerned that the convention's provisions on asset recovery be
realised. Stolen wealth must be returned to its rightful owners. This aim dovetails with
TI's campaign to trace laundered money, launched at Nyanga in March 2001.7
In addition to setting standards for its signatories to stop bribery, the UN itself must
be vigilant, targeting unfair practices (such as vote buying) within the UN system.
* The strengthening of the OECD Anti-Bribery Convention.
Not only must the Anti-Bribery Convention be better enforced, but it must also be
amended to include a ban on bribery of foreign political parties and their officials (see
`Will the OECD Convention stop foreign bribery?', Chapter 7, page 128).
* The establishment of political corruption on the donor agenda.
International financial institutions and bilateral donor agencies must consider more
carefully political corruption in countries to which they lend or grant money, yet
establish sensitive evaluation criteria regarding corruption levels (see `Governance,
corruption and the Millennium Challenge Account', Chapter 7, page 135). Recipients
of international aid need incentives to improve their records on transparency and
enforcement of political finance rules, conflict of interest legislation and the granting
of immunity.
* The enhancement of legislation at the national level on political funding, disclosure
and conflict of interest, and the strengthening of institutions in the area of enforcement.
TI will promote better legislation as well as its enforcement at both national and
international levels, in the hope that stonger and more comprehensive legal regimes
against political corruption will have a direct impact on the achievement of justice.
Transparency International demands that civil society actors around the world be
Introduction 17
5. Fairness and integrity in access to the media
Candidates and parties should have fair access to the media. Standards for achieving
balanced media coverage and media integrity must be established, applied and
maintained. The media should play an independent and critical role, both in election
campaigns and in the broader political process. Instruments such as conflict of interest
legislation should be used to prevent political control of public and private media
from creating a bias in the coverage of politics.
6. Civil society participation
Civil society should actively participate in promoting adequate legislation in the field
of political finance and in the monitoring of political finance and its impact on political
representation. The legal framework, both regulatory and institutional, must enable
civil society organisations, in conjunction with independent media, to undertake such
activities. This framework should also provide access to information, the opportunity
for civil society input on pending legislation, and legal remedies, among other measures.
TI 02 chap01 7/1/04 11:39 Page 17

Posted by maximpost at 10:35 PM EST


Extracting Transparency

David L. Goldwyn

The construction of energy infrastructure in the developing world, from oil pipelines to power plants, is a lightning rod for international and domestic criticism. Critics fear that governments will steal natural resource wealth, disregard the environmental impact of pipelines or other extraction methods, destabilize neighbors with their new wealth, or stir domestic unrest over allocation of resource revenues.1 Although these problems are indeed real and recurrent, the true fault lies with bad governments and bad governance, not with the infrastructure itself. Nevertheless, the need to create wealth in the developing world and to deliver energy to the two billion people who lack access to electric power is greater than ever. Public policy should, therefore, be aimed at encouraging or obliging nations rich in non-renewable resources to commit to transparency in public finance.2 This would include publishing the sources and amounts of government revenue, disbursement, and borrowing practices.3

In this issue, our authors examine the impact of energy infrastructure on political stability. Aude Delescluse looks at the landmark Chad-Cameroon pipeline to assess whether the World Bank-monitored framework for channeling Chad's oil revenues into economic development can be a model for other nations. Toufiq Siddiqi examines the potential for new oil and gas pipelines across South Asia to forge integration in a region historically beset by deep distrust between neighbors. Fiona Hill looks to the Caspian region and the new oil and gas pipelines from Baku, Azerbaijan to Ceyhan, Turkey to assess whether new infrastructure built by Western companies will be a springboard for the development of these nations or a magnet for internal rivalry over the allocation of hydrocarbon revenues. Edward Chow examines Russia's rapid rise as an oil power and the evolving tensions between the government's monopoly on transportation infrastructure and the desire of Russian and international companies to ensure they can export the oil they produce.

In each case, new energy infrastructure is viewed as a potential financial cure for nations that need revenue to alleviate poverty. Yet, in each case, distrust of national governments or deep disagreements among the governed both challenge the ability of private actors to build and operate the infrastructure in question, and create potential for new wealth to become a source of conflict in itself. For any civil society to have informed views about the costs and benefits of energy infrastructure, and the wealth it can create, governments must be transparent about the wealth that can be obtained and how it will be spent. For this reason, this article addresses this fundamental concept of transparency.

David L. Goldwyn is President of Goldwyn International Strategies, LLC. He was Assistant Secretary of Energy for International Affairs in the second Clinton Administration.

Russian Pipelines:
Back to the Future?

Edward C. Chow

In Soviet mythology, the health of the country's economy, national power, and influence in the world are directly linked to the performance of its oil and gas industry. It is ironic, then, that peak oil and gas production in the U.S.S.R. was reached in the late 1980s just as economic collapse brought political disintegration. At the time, the Soviet Union was the biggest oil producer in the world, generating 12 million barrels per day, 11 million in Russia alone. Peak consumption at this time was over 8 million barrels per day in the Soviet Union and 5 million barrels per day in Russia. Considerable volumes of crude oil and petroleum products were exported by the Soviet Union, first to other countries in the Eastern Bloc, and then approximately 3 million barrels per day to those outside of the Comecon.1 Oil and gas were part of the important barter trade in the Communist block and provided economic leverage for Russia in maintaining cohesion of the sphere. Moreover, they served as principal sources of hard currency and geopolitical assets in the Soviet Union's relationship with the outside world.

Given the remote location of many Russian production fields, pipelines have always played a critical role in transporting oil and gas. The construction of a vast system of pipelines was often cited as a crowning achievement of the Soviet oil and gas industry. They were designed to move production primarily within the Soviet Union and Eastern Europe and secondarily for export to the West.

Today's Russia inherited from the U.S.S.R. 46,000 km of these crude oil pipelines, 15,000 km of petroleum product pipelines, and 152,000 km of natural gas pipelines, almost all of which are still owned and controlled by the state. By contrast, the United States, with only 55 percent of Russia's land mass, has over four times more oil pipelines and two times more natural gas pipelines, almost none of which are owned or controlled by the government.2

The Russian oil industry privatized and modernized throughout the mid-1990s. A more competitive cost structure after the ruble collapse of 1998, improved property rights protection leading to greater reinvestment, and the introduction of Western technology and business practice allowed Russian oil production to recover from a low of 6 million barrels per day to nearly 8 million barrels per day. This is still far below the level achieved in the peak production year of 1988. Nevertheless, domestic oil consumption has dropped to only about 2? million barrels per day with lower economic activity and better energy efficiency. As a result, much more oil is being exported today, and Russia has become the second largest oil exporter in the world after Saudi Arabia.3

Russian oil production is forecast to maintain this rapid growth while domestic consumption is expected to be relatively flat in spite of better economic performance. The existing pipeline system was, however, designed to move oil to now diminished domestic markets and less desirable markets in Eastern Europe. Thus, Russia is desperately in need of new export facilities-large-diameter pipelines and deep-water marine terminals-to transport increasing volumes of oil to higher-value world markets in the large ocean-going tankers favored in international trade.

Edward C. Chow is Visiting Scholar at the Carnegie Endowment for International Peace.

A Model Pipeline?

Aude Delescluse

In early October, Chad joined the club of oil-exporting countries as a result of a unique agreement between its government, a consortium of oil companies, and the World Bank. This partnership, known as the Chad-Cameroon Petroleum Development and Pipeline Project, could change the destiny of Chad and its 7.5 million inhabitants. The project has generated debate regarding whether it could serve as a model for future projects: if successful, not only would it significantly reduce poverty in Chad, it could also encourage other mineral-rich developing countries, multinationals, and aid agencies to emulate it. Moreover, this unique pipeline could overcome the so-called "oil curse" that oil-exporting countries have traditionally suffered by ensuring that petroleum revenues are channeled towards national development. Perhaps due to the importance this project plays in an economy with few natural resource alternatives to oil, Chad has embarked on a path with the World Bank to minimize the risk to private investors. The country also committed to an ambitious program of reforms, including a broad-based consultative process to feed into project design, an oil revenue management plan, capacity building and structural reforms, and the creation of external controls. Nevertheless, the initiative is not without its challenges. Indeed, guaranteeing that oversight mechanisms and good governance standards are realized and enforced, as well as ensuring that political stability is maintained in a country with a history of political volatility are essential to the project's success. The future holds promise for the people of Chad and their government if, in partnership with the foreign entities, they prove able to reap the benefits of this lucrative opportunity. The lessons learned as a result may inform, and herald the onset of, a new generation of development projects.

Aude Delescluse works for the Agence Francaise de Developpement in Lebanon. Previously, she was an energy consultant for the World Bank.

Pipelines in the Caspian:
Catalyst or Cure-all?

Fiona Hill

With questions over future prospects for Iraqi oil-the world's second largest reserves after Saudi Arabia-at the forefront of attention, along with widespread instability in the Middle East, the Caspian Basin and its oil and natural gas resources are back on the agenda. The Caspian, along with Russia, West Africa, and Canada, where new discoveries in the tar sands have been made, are the great new potential sources of world energy. These regions are increasingly vital to addressing the need for new energy suppliers and bypassing OPEC members and Persian Gulf states. Although these regions pose significant difficulties in terms of production and export possibilities and would not necessarily be competitive with the Persian Gulf under a low oil price regime, current high crude oil prices combined with the fact that Iraq's production potential will not be restored any time soon make them major commercial contenders.

In the Caspian Basin, the difficulty has never been one of supply-the region contains 17 to 33 billion barrels of proven oil reserves and around 232 trillion cubic feet of natural gas.1 It has always been one of overcoming the fact that the Caspian is a landlocked sea and of transporting energy resources to world markets. With the collapse of the Soviet Union, the region's limited energy pipeline infrastructure extended only across Russia. The new independent states of the Caucasus and Central Asia were locked into a single set of transportation options to the Black Sea and Europe. Oil and gas exports from Azerbaijan, Kazakhstan, and Turkmenistan required building new pipelines. The Caspian region therefore became a focal point in the 1990s, when the first international oil contracts were signed. Because of the sheer size of Caspian energy reserves, and the evident importance of export revenues for the future development of faltering regional economies, Caspian governments transformed pipelines from merely transportation projects into means to achieve political and social objectives. In public debates about Caspian pipelines at both regional and international levels, the commercial interests of companies investing in the actual energy production were sidelined and often seemed strangely secondary or marginal to other considerations.

The Baku-Tbilisi-Ceyhan pipeline project (BTC) provides the best example of this transformation.

Fiona Hill is Senior Fellow in the Foreign Policy Studies program at the Brookings Institution.

India and Pakistan:
Pipe Dream or Pipeline of Peace?

Toufiq A. Siddiqi

In spite of steady economic progress and accelerating rate of growth in India and Pakistan in recent years, their per capita income is still less than a tenth of that in the developed world.1 Continued economic growth is the key to eliminating poverty and maintaining stability on the Subcontinent. This growth, however, is dependent on access to affordable and reliable energy sources that are not available domestically. Many have begun to look to a natural gas pipeline from the rich fields of the Persian Gulf and Central Asia to the Subcontinent as a potential solution.

Even though the economic benefits provided by a pipeline are clear, there are immense political obstacles to such a project. A pipeline from Central Asia would have to pass through politically unstable Afghanistan, as well as Pakistan, whereas one from Iran or the Emirates would have to pass through most of Iran and Pakistan before reaching India, whose leaders fear that the pipeline would give economic leverage to Pakistan in any future political crisis. Others believe that a pipeline could serve as an important confidence-building measure and facilitate the improvement of relations between the two countries-a veritable "pipeline of peace." This article argues that measures could be taken to largely depoliticize the pipeline, and enable it to be built for the economic benefit of India, Pakistan, and the rest of the region. It could then serve as a building block of peace between these two hostile neighbors.

Toufiq A. Siddiqi is President of Global Environment and Energy in the 21st Century, Adjunct Senior Fellow at the East-West Center, and affiliate graduate faculty member at the University of Hawaii. He has been Regional Advisor for Energy at the United Nations ESCAP, Senior Fellow at the East-West Center, and Associate Professor at Indiana University, Bloomington.

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Oil Revenue Accountability in Iraq: Breaking the Resource Curse OSISvetlana Tsalik, director of the Open Society Institute's Revenue Watch program, told the U.S. Institute of Peace on January 22 that Iraq's oil revenues are likely to become a source of instability if they are not managed in a transparent manner by a government that the Iraqi people see as legitimate. Tsalik, who has done extensive studies on oil revenue and transparency issues, described the current management of Iraqi's oil revenues as marked by confusion and having virtually no oversight. She said all oil revenue spending decisions are made by the U.S. installed Coalition Provisional Administration's (CPA) Program Review Board, which is composed almost entirely of CPA appointees. The Board's one Iraqi member, Iraq's Finance Minister Kamel al-Keilani has attended only two of the Board's twice weekly meetings, according to Board minutes. Meanwhile, the Board has spent over 2 billion dollars without any audits or oversight mechanisms in place.In addition to highlighting the current lack of transparency and accountability in Iraq, Tsalik pointed out that these problems are likely to be exacerbated by a combination of economic and political challenges known as the "resource curse." REVENUE WATCHBRIEFING NO. 5
2 REVENUE WATCH BRIEFING NO. 5The resource curse is a paradox faced by resource-rich countries like Iraq where the natural resource wealth that should propel development actually results in slower economic growth, increased poverty, higher levels of corruption, worse governance, and greater potential for violent conflict.Onereasonthatsomanycountriessufferfromtheresource curse is because natural resource revenues discourage good governance and the absence of good governance permits poor fiscalpolicy."The challenge of avoiding the resource curse in Iraq will be doubly difficult,"Tsalik said. "Even oil-rich places that look good today, like Norway and Alaska, struggled for years with inflation,unemployment,anderraticboom-bustcycles."Tsalik noted that in an oil-based economy like Iraq's, the resource curse can weaken the non-oil sector of the economy as foreign currency for oil floodsinandmakesdomestic goods more expensive than those produced abroad. Without proper planning, oil-based economies create non-labor intensive industries that generate only a small number of jobs that require high skills and training. In developing countries, these jobs are often filledbyforeigners. Meanwhile,othersectorsoftheeconomywitherandoverall unemployment increases. Finally, because oil prices are unsteady, any medium to long-term budget planning will be extremely difficultforanIraqieconomybasedlargely on oil.Beyond these economic effects, Tsalik explained that the resource curse can also create or reinforce significantpoliticalproblems.Havingnaturalresourcesexclusivelyinthe hands of undemocratic governments gives unaccountable leaders enormous power. Such governments do not have to compete in elections and are not accountable for choices about taxation, spending policies, and use of oil revenues. And, as Saddam-era Iraq and Saudi Arabia demonstrate, unaccountable governments can use their control of oil revenues to buy off influentialgroupstopreserveandentrenchtheirrule.Tsalikadded that the lack of good governance in oil-rich states like Iraq enables government to keep oil revenue information secret and pursue poor fiscalpoliciesthatprovidelittlepublic benefit.Tsalik then examined the potential problems of the resource curse given Iraq's history and its current situation. She said Iraq does not have a tradition of fiscaltransparencyoraccountability.During Saddam's long rule, government budgets were a state secret and any disclosure was punished with either imprisonment or death.Under tight UN sanctions and Saddam's reign, corruption flourished and continues to thrive after his fall. Iraq's Oil Ministry recently estimateds that 25 percent of Iraqi oil meant for domestic consumption is smuggled out of the country.
O I L R E V E N U E A C C O U N T A B I L I T Y I N I R A Q : B R E A K I N G T H E R E S O U R C E C U R S E 3The unemployment rate in Iraq continues to range from 60 to 70 percent. Narrow, oil-based development policies will do little to alleviate this massive joblessness. Most Iraqis who do have jobs work at one of 192 state-owned enterprises. Tsalik said that many of these businesses are likely to be privatized or restructured soon, thus further increasing unemployment.The International Advisory and Monitoring Board (IAMB) mandated by the UN in May, and comprised of representatives from the UN, the IMF, the World Bank, and the Arab Development Fund, finallyhasstartedtooperateaftermonthsofwranglingwiththeCPAoverhow much monitoring and enforcement power it should have. Yet Tsalik said it remains to be seen whether the IAMB will have the authority and the resources to be effective. Moreover, it is unclear what institution will continue the IAMB's watchdog function once it is dissolved with the establishment of an internationally recognized government in Iraq.In order to meet these challenges, Tsalik made several recommendations.The firstpriority,shesaid,istoestablishagovernmentthatisrecognizedbytheIraqipeople as legitimate and not an American puppet. Iraq's economic recovery will require a total overhaul of the economy, and a break with Saddam's patronage system that rewarded loyal families with lucrative contracts at public expense. These reforms will only be possible with a government that Iraqis consider to be their own and working in their interests. A second priority identifiedbyTsalikwastoavoidrushingeconomicreform.Ambassador Bremer has proposed the most liberal trade regime in the Middle East for Iraq, with provisions that far exceed anything found even in the United States. Bremer's plan would allow 100 percent foreign ownership of Iraqi state-owned enterprises, except in the oil sector; suspend tariffs and duties for imports and exports; permit unrestricted repatriation of profitsand assets--a policy believed to have contributed to the crises in Southeast Asia and Argentina; and a flattaxrateof15percent--agoallongsoughtbyconservativesintheUnitedStates.According to Tsalik, such an approach runs the risk of a Russia-style privatization in which property moves into private hands before a system of corporate governance and law exists, and creates incentives for asset stripping, not investing to build asset value. Moreover, in a rushed Iraqi privatization, the buyers most likely to have the resources to purchase state assets are those who prospered handsomely under Saddam Hussein's regime. A third priority should be to bring transparency to Iraq's rebuilding process. Procedures must be introduced to ensure that Iraqis are getting good value and an equal chance at employment in the reconstruction of their country. Tsalik said that many Iraq reconstruction contracts are going to well-connected Western and regional companies, while unemployed Iraqis experienced in rebuilding their war-torn country could do the job at a fraction of the cost. She pointed out that even Ambassador Bremer admitted in testimony to the U.S. Congress that Iraqi construction costs are about a tenth of those of U.S. companies. The CPA should announce the winners of tenders as well as provide the names of companies that have bid. It should also ensure that Iraqis are represented on all committees to evaluate tenders.
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Finally, Tsalik said that the idea of establishing an Alaska-style public dividend fund based on oil revenues is gaining popularity in Iraq. Revenue Watch has produced an oil funds book with 10 case studies including the Alaska Permanent Fund. According to Tsalik, this research has shown that dividend style funds are most appropriate when there are large oil resources and a small population, strong fiscaltransparency,effectivecorruptioncontrols,andan efficientcivilservice.For Tsalik, such a dividend fund in Iraq is premature for two reasons. First, it is likely to be a long time before Iraq's oil resources generate enough revenue to start paying dividends to citizens. According to the 2004 Iraqi budget, Iraq's oil revenues are not even enough to sustain the government's operating costs, let alone fund the country's costly reconstruction. Iraq's budget for 2004 is estimated to close with a $600 million deficit.Second,distributingdividends to every eligible Iraqi requires a trustworthy civil service. Tsalik felt that Iraq's tattered civil service and the country's current, extreme levels of corruption could not guarantee that dividend payments get to the designated recipients.Tsalik urged those involved in the rebuilding of Iraq, particularly the United States and the CPA, to consider these recommendations. She concluded that effective oil revenue tracking, transparent budgeting, and independent auditing to monitor fiscalaccountabilitycan play a critical role in helping Iraq overcome its current problems and those posed by the resource curse.
Copyright ? 2003 Open Society Institute. All rights reserved.Anthony Richter, Director, Middle East Initiatives and Central Eurasia Project Svetlana Tsalik, Director, Revenue Watch Isam al Khafaji, Baghdad Director, Iraq Revenue Watch Julie McCarthy, Researcher Iraq Revenue Watch monitors Iraq's oil industry to ensure that it is managed with the highest standards of transparency and that the benefitsofnationaloilwealthflowtothepeopleofIraq.IraqRevenueWatchcomplements existing Open Society Institute initiatives that monitor revenues produced by the extractive industries. In many parts of the world, the lack of proper stewardship over oil resources has resulted in corruption, the continued impoverishment of populations, and abuses of political power. By prompting governments to tackle these problems early, the Open Society Institute hopes to help Iraq avoid this plight.The Open Society Institute currently supports a recently launched initiative, Caspian Revenue Watch, which monitors the development of oil production in the Caspian basin. The goal is to promote transparency, accountability, and public oversight in the management of oil and natural gas revenues. Iraq faces even greater challenges than the Caspian region. If Iraq is to become an open, democratic society it will need to develop transparent accountable institutions for ensuring honest management of oil revenues.There is an urgent need for Iraq Revenue Watch given the current occupied status of the country. The Coalition Provisional Authority and the Iraqi Governing Council should establish rules that ensure complete transparency regarding Iraqi oil revenues. So doing will foster a stable, democratic Iraq, and will protect the Coalition Provisional Authority from charges of misappropriation during this period of trusteeship over Iraq's reconstruction.The Open Society Institute, a private operating and grantmaking foundation based in New York City, implements a range of initiatives throughout the world to promote open society by shaping government policy and supporting education, media, public health, and human and women's rights, as well as social, legal, and economic reform.For more information, contact:Iraq Revenue Watch programOpen Society Institute400 West 59th StreetNew York, New York 10019USAE-mail: irw@sorosny.org
OPEN SOCIETY INSTITUTEMiddle East and North Africa InitiativesCentral Eurasia Project

Keeping Secrets:America and Iraq's Public FinancesOSIAs the Bush Administration seeks billions more for reconstruction in Iraq the management of Iraqi oil revenue deserves more attention. As the primary repository for Iraqi oil and gas revenue, the Development Fund for Iraq (DFI) plays a crucial role in fostering public confidence about how the occupying powers manage the country. Yet hopes that the Fund would be an example of transparency,
good governance, and civic participation have been disappointed. Almost five months after establishment of the DFI and following some $1 billion in expenditures there is minimal information about these financial flows and no mechanisms have been established allowing the international community to monitor the Fund. With international
donors gathering for an Iraq reconstruction meeting in Madrid on October 24 the operations of the DFI must become a priority.On May 22 the UN Security Council Resolution 1483 acknowledged the DFI's establishment
to meet the humanitarian needs of the Iraqi people and finance the reconstruction of Iraq's infrastructure. The DFI is the sole repository for Iraq's oil revenues, and its remaining revenue streams come from the transfer of frozen assets from abroad, and funds remaining from the UN oil-for-food program. The terms establishing the DFI require it to be "managed in a transparent manner for and on behalf of the Iraqi people."1 Provisions in Resolution 1483 hold the DFI to high standards of transparency and accountability and these clauses are mirrored in the DFI's founding regulations under the U.S.-U.K. led Coalition Provisional Authority (CPA).2REVENUE WATCHREPORT NO. 3OCTOBER 2003
2 REVENUE WATCH REPORT NO. 3The CPA's initial emphasis on high standards of transparency and accountability
for the DFI was a necessary and positive step toward institutionalizing democratic governance and civic participation in Iraq. Unfortunately, the CPA has done little to implement these standards.The International Advisory and Monitoring Board (IAMB), an international body intended to oversee DFI disbursements, has yet to be established. Administrator Bremer has so far opposed an IAMB mandate that would grant the Board expansive, independent auditing powers.3 Instead, DFI expenditures have been managed by a Program Review Board (PRB) designed by and comprised of CPA appointees, only one of whom is Iraqi.It is critical to Iraq's economic and political development that the DFI emerge as an efficient, transparent, and accountable funding mechanism. To ensure the effectiveness
and credibility of Iraq's public funds, this report calls upon the relevant authorities to do the following:A Establish the IAMB, as mandated by the UN, and afford it full auditing authority; A Improve the transparency of both the DFI and the Program Review Board (PRB); and A Empower Iraqis to participate in the fiscal oversight of their country.This report also explains the structures for collecting and overseeing Iraq's oil revenues,
and provides recommendations to improve the transparency, inclusiveness, and accountability of these institutions.Failure to improve the management of Iraq's public finances and reconstruction
effort risks prolonging the cost to all involved in terms of dollars and lives. Without change, U.S. authorities in Iraq likely will find themselves increasingly isolated as international
donors lose confidence in the CPA's efforts to stabilize and rebuild Iraq. The world community must take advantage of this unique opportunity to institutionalize the highest standards of resource management in Iraq, and prevent one more country from succumbing to the poverty and corruption that plague so many resource-rich countries.
K E E P I N G S E C R E T S : A M E R I C A A N D I R A Q ' S P U B L I C F I N A N C E S 3Development Fund Structure and BoardsDevelopment Fund for IraqThe DFI is maintained on the books of the Central Bank of Iraq, but held by the U.S. Federal Reserve Bank of New York.4 The Fund is the repository for Iraqi oil revenues and formerly frozen Iraqi assets from abroad.5 The DFI receives 95 percent of the proceeds from the sale of Iraqi oil and natural gas, with 5 percent going to the UN's Gulf War Compensation Fund.6 The DFI is supplemented by the remaining funds from the UN Oil-for-Food Programs account.7 The Fund also receives transferred financial assets from overseas that were removed from Iraq by Saddam and his officials during his regime. This month an international donors' conference
in Madrid, Spain, will decide whether non-coalition foreign aid will go into the DFI, or a separate multi-donor Iraq trust fund.The two main oversight structures for the DFI are the Program Review Board and the International Advisory and Monitoring Board. Currently, the PRB manages the Fund under the supervision of the American-British-led CPA headed by Administrator Bremer. The IAMB is still being established, and at present, its responsibilities are limited to auditing the collection and use of DFI funds.As of August 12, the DFI account held a current balance of (US) $1.4 billion.8 To date, DFI funds have been used to pay Iraqi public sector salaries, to compensate families for the loss of members by actions of Coalition Forces, and the day-to-day functioning of the Iraq Governing Council and Ministries.9The Program Review BoardThe PRB recommends specific DFI expenditures for the CPA administrator to approve. The Board works within the CPA's Office of Management and Budget and reports directly to Administrator Paul Bremer through his appointed acting PRB chair, Sherri Kraham.10 After the PRB approves funds, they are disbursed to the Ministry of Finance, which is then responsible for distributing money to all other ministries.11 Other key bodies related to economic policymaking
are the Planning Ministry and the Oil Ministry, which is run by a returning exile.12The PRB has 11 voting members representing the CPA, and 10 non-voting members (see Appendix 1 for full list). According to the PRB's founding regulations, the PRB must operate transparently and is required to: 1) publish and broadly disseminate funding plans in Arabic, and 2) publish the minutes of all formal sessions of the PRB.
4 R E V E N U E W A T C H R E P O R T N O . 3 The International Advisory and Monitoring BoardUN Resolution 1483 set up the IAMB to address relations between the United Nations and the U.S. and British-led occupying forces. It is the primary vehicle for guaranteeing the transparency
of the DFI and for ensuring that DFI funds are used properly.Although mandated nearly five months ago by the UN, the IAMB has yet to be established
and begin operating. Much of the delay is due to negotiations between the IAMB's potential members and the CPA over the extent of the body's mandate.13 Disagreements between the coalition and international institutions have centered specifically on proposals for a system of "special audits," which would allow the monitoring board independent powers to look at any expenditure in depth.14 IAMB members have agreed on revised terms that include this special auditing power, and these were sent to Administrator Bremer by the Secretary General
in late September 2003. As of early October, Administrator Bremer has still not approved the terms of reference for the board. According to UN Security Council officials interviewed, he is seeking veto power over IAMB special audits--a demand that international institutions view as an unacceptable check on their independence.15The IAMB is comprised of four members representing the UN, the International Monetary Fund, the World Bank, and the Arab Fund for Social and Economic Development.Council for International CoordinationThe Council for International Coordination (CIC) advises the PRB on matters relating to international efforts to assist Iraq's recovery and development of its economy. CIC activities include raising funds from the international community, proposing specific projects for funding
consideration, and, as requested by the PRB, making recommendations with regard to disbursements from the DFI.The CIC is made up of representatives from CPA countries participating in the Coalition
and other individuals hand-picked by Ambassador Bremer.16 The CIC is charged with reviewing and reconciling needs information and assessments from various ministry budgets, the UN, the World Bank, and NGOs.17
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Areas of ConcernThe funds and various boards created to rebuild Iraq have significant shortcomings. Given public doubts within Iraq and internationally about the motives of the U.S. intervention, and the increasing costs of the occupation and reconstruction, it is high time that urgent solutions
that can accommodate the interests of the Iraqi people, the mounting concerns of the American people, and the legitimate questions raised by the international community be put in place. If the areas of concern described below are not addressed quickly, the reluctance of many potential contributors to Iraq's reconstruction will continue to grow, and Iraqi faith in the CPA's management of its finances will falter.Development Fund for IraqContracts and expendituresBidding processes for reconstruction contracts have taken place behind closed doors, and then publicly reported by the CPA only after award decisions have been made.Anwar Diab, an Iraqi businessman recently returned from Baghdad, believes there is a fundamental lack of transparency in CPA contracting practices at present. This, coupled with a lack of Iraqi Ministry participation, means that it is difficult, if not impossible for Iraqi vendors to compete with their American counterparts. Mr. Diab says that "often American products are asked for specifically by name, and it appears that bids are written to legitimize offers that have already been received." Moreover, "contractors are asked to submit bids... then they hear that the first part of a contract has been cancelled...and the second part is being split among four favorites- how were these favorites decided, on what merits? No one knows."18The French UN Mission's First Secretary Damien Loras notes that it is nearly impossible
for the international community to determine how DFI funds have been disbursed. "Spending should not have happened without the IAMB in place," says Loras. "We don't know if spending is being done consistent with Resolution 1483. Moreover, what does it signal that the DFI account of the Iraqi central bank is being kept in a Federal Reserve Bank in New York?"Access to informationThe Department of Defense, the Office of Management and Budget, and other agencies within the Bush Administration
have refused to disclose basic information about large purchase contracts and DFI expenditures in Iraq.19A Government Reform Committee staffer, who spoke on condition of anonymity, said getting information on contracting in Iraq has been "maddening, like running up against a brick wall."20 The staffer noted that agencies under the Administration's control had thwarted efforts by the United States Army Corps of Engineers to provide information.
6 R E V E N U E W A T C H R E P O R T N O . 3 According to a Security Council diplomat, who asked to remain anonymous, "The international community knows absolutely nothing about the Fund's management; we know that $1 billion went into it from the UN Oil-for-Food program in May. Since then, that money has disappeared, and there are rumors that the current balance is zero."Program Review BoardOversight and inclusionThe PRB allows only one voting Iraqi on its 11-member board. Minister of Finance Kamal al-Kilani, the current Iraqi board member, is considered by many Iraqis as a pro-U.S. outsider.21 According to the PRB meeting minutes made public so far, al-Kilani was not in attendance. Beyond al-Kilani, Iraqi participation in the PRB is limited to public outreach meetings with Iraqi specialists.22One former Iraqi advisor to the CPA who asked to remain anonymous told Iraq Revenue
Watch that the CPA Economic Policy Office operates behind closed doors without Iraqi involvement to determine what is presented to the PRB for consideration. The Iraqi Planning and Oil Ministries are supposed to be involved in economic policy making, but do not have representation on the PRB. It is unclear how the CPA intends for them to participate in decision
making, particularly regarding contract decisions and oil production and sales.In terms of international consultation, a UN legal expert working closely on Iraq, who also request anonymity, told IRW that, "The UN is given 24 hours to comment on a 360 page document, and then the next day the document is published as law with a preambular paragraph claiming to have consulted with the UN."Access to informationThe PRB has met twice a week since July 2003.23 Yet by mid-September 2003, the CPA had only produced minutes for one August meeting. Finally, on September 24 the CPA published eight sets of PRB minutes, documenting the approval of approximately $1 billion in expenditures between August 12 and September 2, 2003. There is no current balance for the DFI in the last minutes published by the CPA. Overall, the PRB minutes do not encompass all DFI funded projects (information, which, to date, is not available anywhere); they do not disclose the DFI's current balance; and they do not always make clear whether DFI funds or U.S. appropriated funds are at stake in expenditure decisions. On September 26, the CPA responded to IRW inquiries and said that although the PRB is committed to transparent operations, it lacks the "resources, staff and time" to maintain the level of transparency it aspires to.There is no regular reporting about the PRB's activities on the CPA website. Likewise, there is no information about the CPA's Office of Management and Budget within which the
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PRB functions, although the site does provide links to every other CPA office. The PRB has also not published its minutes in Arabic as of this report, which it is required to do by its founding regulation.International Advisory and Monitoring BoardOversight and inclusionReflecting the language of UN Resolution 1483, UN member states expected the IAMB to function
as the Security Council's "eyes and ears" on the DFI. Yet Security Council members and UNDP officials say that Administrator Bremer and the Bush Administration strongly opposed ceding substantive authority to the IAMB.France, Germany, and Russia found the first U.S. proposed draft of the IAMB's terms of reference unacceptable because they limited the IAMB's role to simply confirming the appointment of U.S. picked accountants and checking whether accounting reports were consistent with international standards. Essentially, under these terms the IAMB's only function
would have been to audit the auditors.Revised terms agreed to by IAMB members give the board broad powers to audit oil exports as well as DFI receipts and expenditures. The board, however, still has no authority over DFI spending, and hence is limited to a backward looking audit function after spending decisions
have been made. As previously noted, these terms are pending approval by Administrator Bremer, who opposes the "special audit" authority requested by IAMB members.24Despite the revisions, the draft terms of reference offer only a possible role for Iraqi participation, and have no actual requirements for the inclusion of Iraqi board members. The terms also lack specific reporting and procedural requirements. Many countries with frozen Iraqi assets are reluctant to release them until the IAMB is formed.25International SkepticismThe United States' administration of Iraqi development funds and its efforts to limit the power of the IAMB have created a growing sense of frustration among members of the international community.One Security Council diplomat interviewed for this report predicts that absolutely no money will flow into the DFI from the international community, unless there is a sudden change in CPA attitudes and practices regarding transparent management. Moreover, he said, "We will not donate money to the DFI unless we can be sure that it will not go straight to the Halliburtons, Bechtels, etc., and that there is Iraqi ownership and participation in the budgetary
and contracting processes."The international community's skepticism toward U.S. reconstruction plans has prompted calls for the upcoming international donors' conference in Madrid to channel contributions
into a separate international Iraqi reconstruction fund. France and Germany are
8 R E V E N U E W A T C H R E P O R T N O . 3 among the countries pushing for such a fund, which would be managed by the UN, the World Bank, and possibly the IMF.Gunter Pleuger, Germany's ambassador to the United Nations, says "We believe that the necessary international support will only be forthcoming if full transparency and international
participation in the decision making process are assured. The creation of a separate international fund could dispel some concerns, expressed by some members of the United Nations, with regards to the (US-controlled) Development Fund for Iraq."26The international community's frustration with the lack of transparency and cooperation
is justifiable. However, the possible splintering of Iraq's resources is a disappointing development, which could have been avoided by applying international best practices in transparent
management to the DFI from the beginning.Two separate funds could conceivably create significant complications for any eventual interim Iraqi administration attempting to make already difficult financial decisions.
Potentially substantial oil revenues and American aid to Iraq would flow through the DFI, while significant European and UN aid would be disbursed under a different spending umbrella with priorities and accountability mechanisms potentially at odds with that of the CPA-controlled DFI.It is critical that Iraqi funds are held to the same standards of inclusion, transparency, and efficiency as the donations of their international counterparts. By fully and promptly living
up to the CPA's obligations regarding transparency and accountability for the DFI, U.S. authorities in Iraq can restore public confidence and avoid forcing Iraqis to mitigate political differences over the management of their finances between donors and funds.RecommendationsTo address the concerns highlighted above, this report provides the following recommendations
on improving fiscal transparency in Iraq:Development Fund for Iraq and the Program Review BoardA Make DFI information accessible and easy to find. Currently, PRB information regarding contracts, tenders, trade developments, currency decisions, and oil activities in Iraq is published sporadically and across a broad range of US Government and Coalition related websites. Information about Iraq's public finances should be published in one central location, updated as frequently as possible and available in both English and Arabic. Reporting should include a record of all flows to and from the DFI. Contracts for selling Iraq's oil and gas as well as all payments that Iraq receives for these exports should be reported, as called for by the G8 and the Extractive Industries Transparency Initiative.
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A Publish all PRB activities. Current levels of PRB/DFI disclosure are inadequate, and are in violation of the regulations establishing these bodies. All minutes of PRB meetings to date should be published, available in Arabic and English, and should appear in one central forum (such as the CPA website) in a timely and consistent manner.A Expand voting and transfer more financial control to Iraqis. Substantive and incrementally
greater Iraqi control of DFI funds through the PRB is critical to restoring international
and Iraqi public trust in the CPA's management of Iraq's financial assets and resources. A stage-based timeline for this hand-over should be established and disseminated as soon as practicable. Iraqi representatives from all ministries should be present at all PRB meetings, and included as voting members in all decisions that affect their ministry's budget and operations.A Transfer the Chairmanship of the PRB to an Iraqi The Chair of the PRB should be an Iraqi, perhaps from the Governing Council, instead of the current American chair; this is the person who sets the agenda for meetings and interfaces with Administrator
Bremer on the Board's decisions. It is critical that given these responsibilities, the Chair is an authentic platform for Iraqi priorities, and represents an Iraqi perspective to the Administrator.International Advisory and Monitoring BoardA Establish the IAMB and give it a significant role in Iraq's reconstruction. The IAMB's terms of reference should be completed, these terms should include a tender auditing role, and the Board should begin operating as soon as possible. It must have substantive
involvement and influence with the DFI in order to restore donor confidence. A credible and effective Board is critical to preventing the need for multiple reconstruction
aid funds and the administrative and political complications they can create.A Encourage the IAMB to pro-actively monitor transparency compliance. The IAMB should work with the PRB to increase compliance with the Fund's fundamental rules on governance and transparency.A Clarify whose interests the IAMB members represent. Although IAMB members are representatives
of international institutions, the terms of reference should clarify that board members act as fiduciaries on behalf of the people of Iraq and that its monitoring
and advisory activities must always prioritize the interests of the Iraqi people. These fiduciary responsibilities include ensuring efficient administration, securing the best available services and goods for Iraq, and supporting the development of Iraqi businesses and the nation's public institutions.
1 0 R E V E N U E W A T C H R E P O R T N O . 3 A Plan for a smooth transition. The IAMB is a temporary body that will be dissolved once an internationally recognized representative government is formed in Iraq. To ensure a smooth transition, it is essential to include Iraqi representatives who will eventually take over the IAMB's role. Board membership or observer status must be extended to Iraq's supreme audit board and to representatives from the Iraqi Finance Ministry.A Clarify selection of new IAMB members. The terms of reference for the IAMB allow for five additional IAMB members. While the document stipulates that the list of potential candidates should include Iraqis nominated by the Governing Council; the terms do not require that Iraqis be chosen. To ensure greater Iraqi inclusion, mandatory
levels of Iraqi participation in the IAMB should be stipulated and required in the IAMB terms of reference.A Give the IAMB a tender audit role. To help IAMB monitoring ensure that DFI assets are used for the benefit of the Iraqi people, the board's mandate should include audit of contracting procedures, with World Bank or U.S. government contracting standards
as appropriate guideposts. This should include the authority to conduct audits to determine whether contracts are awarded on a competitive basis, and mandatory consultation between the CPA and IAMB when the CPA wants to award large, no-bid contracts. The IAMB should also be mandated to conduct independent cost estimates for large purchase and non-bid contracts before they are awarded. If audits completed by the IAMB reveal discrepancies in tendering procedures, in expenditure allocations,
or other areas within the IAMB's mandate, the IAMB should be authorized to subpoena documents and witnesses to clarify the discrepancy. All such proceedings should be documented and reported.A Specify reporting requirements. The inclusion of a reporting requirement is an important step in ensuring the transparency of the IAMB. Disclosure should be strengthened with a clause specifying how soon reports must be made available after the completion
of audits. Disclosure requirements should also mandate that that IAMB reports are "easily accessible" to the public. Such requirements will prevent the problems of availability and access that mark the PRB's disclosure of meeting minutes.
K E E P I N G S E C R E T S : A M E R I C A A N D I R A Q ' S P U B L I C F I N A N C E S 1 1
Appendix 1: Members of the Program Review BoardVoting Members*1. PRB Chair2. Director, Economic Policy3. Director, Civil Affairs Policy4. Director, Agency for International Development, Iraq mission- Lewis Lucke5. Director, Operations6. Director, Security Affairs7. Commander of Coalition Forces8. Iraqi Ministry of Finance9. United Kingdom10. Australia11. Chairman, Council for International CoordinationNon-Voting Members1. CPA Comptroller2. CPA General Counsel3. Program Coordinator of the Board4. Chairman, Council for International Coordination5. U.S. Office of Management and Budget6. U.S. Office of the Secretary of Defense7. International Monetary Fund8. World Bank9. U .N. Special Representative of the Secretary General for Iraq10. International Advisory and Monitoring Board*Members of the PRB are not named here specifically, because their representationhas varied from meeting to meeting. Meeting attendance records can be found on theCPA website within the PRB minutes at
1 2 R E V E N U E W A T C H R E P O R T N O . 3 Notes1. See UN Security Council Resolution 1483, See CPA website, DFI and PRB founding Regulations 2 and 3, and Interviews with numerous UN officials, also see Alan Beattie, Charles Clover, Guy Dinmore and MarkTurner, "Annan Deals a Blow to US Draft Resolution on Iraq Reconstruction", Financial Times, October 3,2003.4. See See UN Resolution 1483, as well as founding DFI Regulation, and See UN Resolution 1483, as well as founding DFI Regulation, and See UN Resolution 1483, as well as founding DFI Regulation, and, see August 12 PRB minutes, under Budget section.9. Coalition Provisional Authority Website, Ministry of Finance section,, also, see Iraq's Public Budget for 2003 at For a chart of the CPA's organization structure, see See CPA website, Ministry of Finance section,, and CPA Memorandum
4 on PRB Regulation 3, Ferry Biederman, Mostly Outsiders Appointed Ministers, Inter Press Service News Agency, September 4, 2003.13. Gathered from discussions with various UN officials and SC diplomats.14. Beattie, Charles Clover, Guy Dinmore and Mark Turner, "Annan Deals a Blow to US Draft Resolution on Iraq Reconstruction", Financial Times, October 3, 2003.15. Gathered from discussions with various UN officials and SC diplomats.16. The following are represented on the CIC: Poland, Australia, Italy, Denmark, the Czech Republic, the United States, South Korea, Japan, Spain, the United Kingdom, Singapore, Jordan and Romania as well as an observer from the United Nations Office of the Humanitarian Coordinator for Iraq.17. L. Paul Bremer, Remarks, Opening of the Council for International Coordination, 17 August 2003.18. Interview with Anwar Diab, October 8, 2003.19. Gathered from conversations with Government Reform Committee staffer and SC diplomats, also see Rep. Waxman's article Evidence Of Waste Of US Taxpayers' Dollars In Iraq Contracts. Because of the sensitivities surrounding questions of financing Iraqi reconstruction, many sources agreed to speak only on condition of anonymity.21. Ferry Biederman, "Mostly Outsiders Appointed Ministers", Inter Press Service News Agency, September 4, 2003.22. Anonymous Iraqi former CPA advisor.23. Interview with senior IMF official, September 2003.24. Interview with UN Security Council permanent member, September 200325. "No Board yet for Iraq Development Fund -US Treasury", Reuters via Forbes online, 8.25.03, Mark Turner, "Separate fund for donations is urged", Financial Times, July 23, 2003
K E E P I N G S E C R E T S : A M E R I C A A N D I R A Q ' S P U B L I C F I N A N C E S 1 3
Copyright ? 2003 Open Society Institute. All rights reserved.Anthony Richter, Director, Middle East Initiatives and Central Eurasia Project Svetlana Tsalik, Director, Revenue Watch Isam al Khafaji, Baghdad Director, Iraq Revenue Watch Julie McCarthy, Researcher Iraq Revenue Watch monitors Iraq's oil industry to ensure that it is managed with the highest standards of transparency and that the benefits of national oil wealth flow to the people of Iraq. Iraq Revenue Watch complements
existing Open Society Institute initiatives that monitor revenues produced by the extractive industries. In many parts of the world, the lack of proper stewardship over oil resources has resulted in corruption,
the continued impoverishment of populations, and abuses of political power. By prompting governments to tackle these problems early, the Open Society Institute hopes to help Iraq avoid this plight.The Open Society Institute currently supports a recently launched initiative, Caspian Revenue Watch, which monitors the development of oil production in the Caspian basin. The goal is to promote transparency, accountability, and public oversight in the management of oil and natural gas revenues. Iraq faces even greater challenges than the Caspian region. If Iraq is to become an open, democratic society it will need to develop transparent accountable institutions for ensuring honest management of oil revenues.There is an urgent need for Iraq Revenue Watch given the current occupied status of the country. The Coalition Provisional Authority and the Iraqi Governing Council should establish rules that ensure complete transparency regarding Iraqi oil revenues. So doing will foster a stable, democratic Iraq, and will protect the Coalition Provisional Authority from charges of misappropriation during this period of trusteeship over Iraq's reconstruction.The Open Society Institute, a private operating and grantmaking foundation based in New York City, implements
a range of initiatives throughout the world to promote open society by shaping government policy and supporting education, media, public health, and human and women's rights, as well as social, legal, and economic reform.For more information, contact:Iraq Revenue Watch programOpen Society Institute400 West 59th StreetNew York, New York 10019USAE-mail: irw@sorosny.org by Jeanne Criscola|Criscola Design
OPEN SOCIETY INSTITUTEMiddle East and North Africa InitiativesCentral Eurasia Project

Posted by maximpost at 5:12 PM EST
Updated: Thursday, 25 March 2004 5:15 PM EST

Reform of the Constitutional Process

Project Director: Prof. Mordechai Kremnitzer
Research Team: Dr. Yotam Benziman Dr. Margit Cohn Adv. Hilli Mudrik Even Chen Dr. Khalid Ghanayim Adv. Efrat Rahaf Adv. Ram Rivlin Mr. Amir Weizenbluth Mr. Guy Wertheim

At the beginning of the 1990s, with the entry into force of two Basic Laws in the field of human rights (the Basic Law on Human Dignity and Freedom and the Basic Law on Freedom of Occupation), Israel entered a new constitutional era. At present, various issues related to human rights are on the Knesset's legislative agenda. These developments have had a profound effect on Israel's legal system and have required the amendment of dozens of existing laws, including the Penal Code and the Laws on Criminal Procedure, Prisons and the Granting of Business Licenses. In recent years, at the request of the Minister of Justice, the Israel Democracy Institute has been involved in the drafting of the necessary amendments. The real significance of the new legislation lies in its educational value: it helps to justify the existence of liberalism within Israeli society and compels legislators and government institutions to closely examine the Basic Laws, in order to ensure that the norms contained therein are also expressed in existing legislation. The Government and the Knesset are expected to carry out a similar examination, particularly in relation to the Basic Law on Human Dignity and Freedom. This is a enormous task, since a large proportion of existing legislation dates back to the period of the Mandate, when democratic values and human rights were not a constitutional priority. The Israel Democracy Institute, in consultation with the Ministry of Justice, is involved in a sweeping process of constitutional reform, which includes the analysis of hundreds of laws in an attempt to harmonize them with the new Basic Laws. In fact, it appears that this multi-year project will lead to a
genuine constitutional revolution in Israel.

Prof. Kremnitzer's research team will seek to enrich discourse on basic concepts of constitutional law and international public law. Developments in legislation and applications of laws and norms which affect the democratic nature of the state, mainly in a negative way, will be monitored. This project will also strive to improve the penal law, adapting it to a modern democratic state. Similarly, developments relating to the judiciary and the attorney general's office will be monitored and proposals prepared regarding criteria for their effective functioning. Additionally, in cooperation with Dan Meridor, the complex relationship between state security and democracy will be researched.

Focus in 2004
Emphasis will be on the issues of human dignity, balancing, proportionality, judicial activism, media ethics, and extortion. Proposals for legislation will be prepared on offences against the democratic regime; offences against property; and homicide. Together with Dan Meridor, a forum of experts will be convened for the purpose of discussing democracy and terror. Prof. Kremnitzer and his team will also collaborate with the Constitution by Consensus educational project in order to generate materials for civics teachers on freedom of speech, as well as with Prof. David Nachmias towards finalizing work on political corruption and accountability.

Publications in Preparation during 2004
Seven position papers:
"The International Criminal Court and Israel"
"Nullification of Citizenship"
"Official Secrets"
"Terrorism and Democracy" (together with Dan Meridor)
"Judicial Activism"
"Media Ethics"
Two books on the issues of Harassment and Libel.

Conferences Planned for 2004
Two conferences on Media and Democracy
Two conferences on Proposals for Legislations of Offences
A conference on Corruption and Accountability

Previous Publications:
1. The (Emergency) Defense Regulations, 1945
2. The General Security Services Bill: A Comparative Study
3. Incitement, not Sedition (English publication)
4. The Proposed Reform of the Court System: Advantages and Dangers
5. Pornography: Morality, Freedom, Equality
6. Religion and the High Court of Justice: Image and Reality
7. Religious Sensitivities, Freedom of Expression and Criminal Law
8. Affirmative Action in Israel: Defining the Policy and Legislative Recommendations
9. Freedom of Occupation - When Should the Government Regulate Entry into Professions?
10.Freedom of Expression against Government Authorities
11. Sub Judice: Freedom of Expression in Matters under Adjudication

Legal Seminar Publications (Hebrew, with English abstracts)

1. Protection of Free Speech in a Democratic Regime
2. The Rule of Law in a Polarized Society
3. Judicial Performance - Critique and Evaluation
4. Freedom of Speech

Social Rights - Should they be included in the Constitution?

Prof. Avi Ben-Bassat and Dr. Momi Dahan, March 2004

Social Rights in the Constitution and Economic Policy
Avi Ben-Bassat and Momi Dahan
English Abstract

Since the founding of the State of Israel there has been considerable public debate concerning the need for a constitution. The Basic Laws passed since 1992 are important milestones in the development of the constitution, but do not include aspects that are customarily included in other constitutions. The "Constitution by Consensus" team established by the Israel Democracy Institute is working to develop a comprehensive proposal for a constitution. This volume provides the infrastructure for considering whether social rights should be included in the constitution, and if so, what should be the desirable level of commitment.

The inclusion of social rights in a constitution is a controversial issue, both in Israel and around the world. For two decades countries with constitutions have debated whether social rights should be afforded constitutional protection or left in the realm of ordinary law. In Israel several proposals have been drafted regarding the inclusion of social rights in a future constitution. The first of these was prepared in 1948 by the Constitution Committee of the Provisional Council of State, and included a broad spectrum of social rights. Most of the subsequent versions were less detailed and committed than the first proposal.

Renewed discussion of the place of social rights in the constitution requires clarification of the grounds in principle and practice; it is also appropriate to draw on the experience of other countries with constitutions. The first chapter of this book reviews the international landscape regarding the inclusion of social rights in the constitution, and presents quantitative indices of constitutional commitment to social rights in 68 countries. The large sample of countries makes it possible to address two questions: first, can groups of countries be characterized according to their constitutional model regarding social rights? Second, to what extent is the constitutional commitment to social rights translated into practice?

A constitution is not the only arrangement by which a system of government can influence social rights. Reinforcing the democratic process by providing due representation for the underprivileged may also serve to protect such rights. While the political power of the underprivileged may prevent excessive inequality in the long term, the opposite also applies. A low level of inequality tends to reduce social tensions, increase political stability, and stimulate economic growth.

It was once assumed that income equality may harm economic growth. The evidence of recent years has shown, however, that in most cases inequality hinders growth. Income equality, growth, and democracy thus go hand in hand. The second chapter of this book analyzes these interrelations as part of the infrastructure for examining whether social rights should be included in the constitution, and what the level of commitment should be.

The need for a constitutional commitment to social rights also depends on the level of inequality in society. Those advocating the inclusion of social rights in the constitution see this as part of the protective net of basic human rights, and one of the safeguards against excessive inequality. The need for such a safeguard is greater in a society characterized by profound gaps in wealth and opportunities. The third chapter examines the sources of inequality in Israeli society.

It is also important to ascertain the sources of inequality in Israel in order to adopt a stand regarding the level of constitutional commitment to social rights. Determining a scale for this depends on considerations of principle as well as on the access accorded under current arrangements in the absence of a constitution. The stand taken will depend on whether these arrangements ensure a high level of access to health services but relatively proscribed rights to education, for example.

The final chapter presents the various considerations presented, and concludes with the recommendation that a clear-cut commitment to social rights be included in the constitution of the State of Israel.

The main conclusions of each chapter are as follows:

Chapter A: Social rights in the constitution and in practice- the main findings

In this chapter, we construct an index of the constitutional commitment to five social rights in 68 countries: the right to education, health, housing, social insurance, and workers' rights.

The frequency with which rights are mentioned in a constitution varies. The right to social security, for example, appears in the constitutions of 47 countries, albeit with a relatively low level of commitment. Only 21 countries commit themselves to the right to housing, however.

Is there such a thing as a typical constitution as regards social rights? Two clear groups emerge among the countries examined. The first provides a high level of constitutional commitment to social rights, and this is typical of countries whose constitutional history derives from the tradition of French civil law. The second group, in which social rights are limited, includes countries whose constitutional history is based on the Common law legal tradition. The constitutional commitment to social rights in countries with a socialist past is closer to that of countries whose tradition is that of French civil law, while countries with a German or Scandinavian tradition are closer to the common law pattern.

We also examined whether the constitutional commitment, reflecting a society's basic preferences, was translated into government policy, accounting for the effect of per capita income, demographic composition, and the strength of democracy. We found that a constitutional commitment to social security does in fact have a positive and significant impact on transfer payments. There is also a positive correlation, though not a statistically significant one, between a constitutional commitment to health and government spending on it. A constitutional commitment to health also has a significant impact on policy performance, as measured by life expectancy or infant mortality. However, a constitutional commitment to the right to education does not influence educational policy, as represented by the extent of participation of relevant age groups in elementary education, and is even negatively correlated with government spending on education.

Chapter B: Equality, democracy, and growth-the main findings

Democracy, economic equality, and the growth of per capita income are important objectives in western countries. In the past it was assumed that these goals were mutually contradictory, and hence it was considered necessary to distinguish between them. Studies undertaken in the 1990s of the relations between these variables have shown that in many countries they actually reinforce one another, while in others they coexist peacefully.

The resilience of democracy, as reflected in the electoral process and civil liberties, increased as standards of living and levels of education improved. Reducing disparities by providing the underprivileged population with a higher standard of living and better education serves to strengthen democracy.

The stronger the democratic foundation of a society, the greater the role of the underprivileged in the election process. This serves to increase government spending, including that on education. The shift in the allocation of resources helps to reduce inequality in income allocation, both in cash and in kind.

The influence of democracy on economic growth is complex, since this is evinced through several channels that have opposing effects. The more democratic a regime, the lower the level of economic inequality, the greater the extent of political and social stability; and the higher the level of human capital. All these channels increase economic growth. However, democratic countries also display a higher level of government spending, as well as lower incentives to invest in the means of production, thus impacting negatively on growth.

The various effects of the strength of democracy on growth neutralize one another. Whenever democratic rights are limited, however, an increase in democracy serves to accelerate economic growth.

All the studies but one show that reducing income inequality does not hamper economic growth, and in fact stimulates it. The correlation between equality and growth is reflected in three channels: (1) Greater equality enhances political and social stability, thus increasing the motivation to invest in the means of production; (2) Greater equality serves to increase investment in education for the population as a whole; note that investment in the means of production and human capital are the two key factors underlying growth; (3) A lower level of inequality dampens the incentive to adopt a policy aimed at changing income distribution by increasing taxation and expanding transfer payments and other social expenditure. While this fiscal policy may hamper GDP growth, no empirical evidence was found to support this view.

Chapter C: The sources of inequality in Israel- the main findings

Income inequality in Israel has risen over the past three decades, and Israel is now one of the countries with the widest economic disparities. This development is the result of factors that apply to all sections of Israeli society as well as to elements that are unique to specific populations: Arabs, new immigrants, and the ultra-orthodox.

The inequality in education is higher than in many other countries, despite the relatively large share of government expenditure on education.

The dire economic plight of the Arab population is one of the main sources of income inequality. This stems partly from discrimination against this population in education and the labor market. Inequality between Jews and non-Jews contributes approximately 16 percent to total income inequality.

The parlous economic condition of the elderly is another key factor behind the high level of income inequality in Israel. Many of the elderly came to Israel at a relatively advanced age, and had no pension rights from their countries of origin.

The government's declining commitment to full employment, as evinced by the flow of migrant workers in recent years, is another cause of income inequality.

Although the ultra-orthodox do not contribute notably to income inequality in the sample, this segment nonetheless accounts for a higher poverty incidence

The disincentive to work inherent in welfare payments causes part of the population to remain outside the work force, leading to a very low level of income. While income inequality among employed persons is lower than for those who do not participate in the work force, the distinction is limited.

Alongside its high level of income inequality, Israel suffers from inequality in net income. Although this is somewhat greater than in most European countries, it is only slightly above its level thirty years ago.

The level of inequality in net income reflects the government's intervention via taxes (income tax, health tax, and National Insurance contributions) and the system of welfare payments (particularly National Insurance payments). While the lower level of inequality in net income than in gross income reflects the government's efforts to reduce this disparity, its contribution is purely technical. To date, no study has been undertaken to examine the government's contribution incorporating the negative impact of welfare policy on the incentive to work.

Over the past two decades there has been a real increase in transfer payments, making a direct (technical) contribution to reducing inequality.

Alongside the expansion of transfer payments, in the last twenty years there has also been a substantial increase in the share of indirect taxes in total taxation, and a sharp reduction in subsidies. The low-income population bears a heavier burden of indirect taxes, but this has not been directly reflected in calculations of net income inequality.

Government intervention is also evident in education and health services, which influence both current and future income. Central Bureau of Statistics estimates indicate that these services are provided progressively. Given the findings regarding the achievements of the education system, however, further studies are needed in order to examine whether this is in fact the case.

Income inequality has increased in western countries, particularly the United States. Three main factors appear to explain this: skiled-bias tecnological change, globalization, and the decline of the labor unions. These factors are also evident in Israel, in addition to those specified above.

Chapter D: The inclusion of social rights in the constitution- pros and cons

The pros
1. Social rights are a precondition for maintaining human dignity. Civil and political rights can only be realized if social rights exist. The right to life is meaningless without a minimum income and access to health services.

2. Most countries include social rights in the constitution, albeit with a relatively low level of commitment. Our study shows that the right to education is the most common, featuring in the constitutions of 51 countries out of 68. The level of commitment to this right also seems to be the highest. The right to social security appears in the constitutions of 47 countries, though with a relatively low level of commitment. Workers' rights (29 countries) and the right to housing (21 countries) are the rarest.

3. protecting social rights in the constitution may provide a safeguard against the excessive growth of inequality in the allocation of income and national wealth, as this inequality embodies social, political and economic dangers. Income inequality in Israel has risen over the past three decades, and Israel now has one of the highest levels of income inequality.

4. The inclusion of social rights in the constitution may provide a safety net for minorities and augment their sense of security. The inferior economic situation of the Arab population in Israel is partly responsible for the high level of income inequality, and is due in part to discrimination against this population in education and the labor market. Income disparity between Jews and non-Jews accounts for approximately 16 percent of total inequality.

5. The greater the level of income inequality, the greater the social upheavals, and hence the graver the threat to the stability of the democratic system. Social unrest may also assume violent forms, at both individual and social levels. At the individual level, economic gaps may generate crime, particularly against property. A milder manifestation of instability occurs when groups organize to secure benefits at the expense of others. Particularly great disparities may lead to demonstrations and even riots. Maintaining social stability in Israel is particularly important given the many schisms within society.

6. Numerous studies have shown that the greater the level of inequality, the greater is social and political instability, thus impairing economic growth.

7. Studies show that a more equal society has a faster growth rate, since the investment in education per child is greater.

8. Alongside the high level of income inequality, the inequality in net income is only slightly higher in Israel than a typical European country. One of the main reasons for the high level of inequality is the disparity in education between different sections of the population. Accordingly, it is important to develop a scale of social rights that prioritizes education. Investment in education is the most effective way of enabling individuals to escape from the cycle of poverty, reducing reliance on government support in generations to come.

9. The inclusion of social rights in the constitution will create an educational and political tool that limits the tendency of the legislature to harm groups that are too weak to exert direct political power.

10. Many of the arguments against the inclusion of these rights in the constitution may be neutralized or diminished by restricting judicial review, as well as by enacting legislation that accords the legislature and government extensive discretion alongside binding constraints.

11. All the comparative studies show that the courts are extremely reluctant to extend judicial protection to issues that require the allocation of substantial resources.

12. Israel's constitution should mention social rights, since the Basic Laws passed in 1992 provide constitutional status for property rights and the freedom of vocation, thus creating a clear imbalance regarding the legal status of social rights.

The cons
1. While reflecting the preferences of society, the realization of social rights, but must be subject to the limited resources available to the economy and the desired extent of government expenditure. Protecting social rights is important, but may ultimately impair social welfare by harming other values, such as the right to property or the ability of the individual to realize his or her full potential. In certain circumstances, awarding far-reaching social rights is liable to act as a disincentive to work, thus depressing economic growth and preventing a rise in standard of living.

2. Priorities change from time to time, and this may also require changes in the rights granted by the state. Tying the hands of the policy-makers will make it difficult to adjust policies to meet changing conditions. For example, a commitment to a particular level of pension is liable to prove difficult to maintain if the share of the elderly in the population increases significantly, as has been the case in Europe over the past 50 years. Realizing this right will place an unreasonable burden of taxation on the working population.

3. To a large extent, the constitution grants the Supreme Court authority in all matters relating to controversial social rights. The legal arena is not the appropriate forum for expressing changes in public preferences or understanding the needs that arise from changing economic circumstances. Ensuring that a decision of this kind is supported by all citizens, and in a democratic system by their elected representatives, will make a response to changing economic circumstances and public preferences possible.

4. Such civil rights as freedom of speech or religion are absolute and inalienable. Social rights, by contrast, are more quantitative in nature. This is difficult to phrase in the verbal form customary in a constitution, however clearly worded. Civil rights also have a quantitative dimension, but to a much lesser extent. Thus, in order to realize the right to vote, an election budget is required, although its scope is relatively insignificant. Social rights, on the other hand, should find expression in the extent of government expenditure on various services and transfer payments to those in need. Even if the way a particular social right is formulated in the constitution is sharp and binding, its practical application may still vary widely. An examination of the effect of a reference to social rights in the constitution on total government expenditure yielded mixed results. Our study shows that some countries succeeded in formulating their constitutional commitment to social security in a manner that was manifested in practical terms. However, our findings also indicate that a high level of commitment to education, as manifested in the explicit declaration that this will be provided gratis, does not ensure its practical implementation, since it may be expressed via fewer or more study hours, a lower or higher quality of teachers, and a larger or smaller number of students per class.

The first three chapters of this book do not yield a clear conclusion on whether social rights should be included in the constitution, although they argue both for and against the inclusion of social rights in the constitution. The ultimate conclusion must be based on weighting and summarizing these arguments, as well as on value judgments.

The decision for or against the inclusion of social rights in the constitution will be the outcome of the relative weight attributed to each of the various contentions. We believe that the sum total of arguments tends in favor of including social rights in the constitution, first and foremost the right to education and social security, however without judicial review of primary legislation.

All rights reserved to the Israel Democracy Institute

"Rabin, in my opinion, is not a particularistic myth for the Israeli left - he is a myth for all of Israel, and if this is the case then the "sanctity" of this site is the sanctity of Israeli-ness and it should be protected."

Haim Zisovich: We are continuing to deal with the rally in memory of Rabin and the graffiti that was found on his memorials in other locations. Good-day to Prof. Yedidya Stern from the Law Faculty at Bar Ilan University and the Israel Democracy Institute.

Prof. Yedidya Stern: Good Afternoon.

Haim Zisovich: Earlier I was talking Commander Sedbon, Commissioner of Police. They are investigating, in an attempt to discover who wrote those slogans, but the laws for which they will be arrested or the investigation is being conducted because they are suspected of breaking laws such as destruction of property or unsuitable behavior in a public place. Should the law deal with negative behavior of this kind with methods other than those already in use?

Prof. Yedidya Stern: Look, there is certainly a degree of tension between freedom of expression and the need to protect key values of society and culture so that they are not trampled by individuals. I would look at Rabin Square as a place that, for significant portions of Israeli society, represents something of an Israeli holy site. We have religious holy sites, we have historic holy sites, but we have almost no contemporary Israeli holy sites. Perhaps Ammunition Hill is one such site, perhaps the Knesset Building was once such a site, before its status declined. Rabin Square is such a site, at least as we approach the anniversary of Rabin's death. And if Israeli law thinks it is important to prohibit by law the desecration of any type of holy site, we should think about other sites that are important enough that their desecration would constitute a criminal offense.

Haim Zisovich: Because of their symbolism, not because of where it is located. Because in reality, when we relate to a monument as property so that, let's say, causing damage to it is similar to destroying a fence or a tree, then the site is diminished to some degree, as is the memory it is supposed to engender.

Prof. Yedidya Stern: Certainly. The sanctity of a physical thing is, naturally, not sanctity in a religious sense, and sanctity - in the sense that it unites us - is our own myth. Rabin, in my opinion, is not a particularistic myth for the Israeli left, he is a general Israeli myth. And if this is the case, then the sanctity of this place is the sanctity of Israeli-ness, and it needs to be protected.

Haim Zisovich: And damage at such a place is not only damage to the memory of Rabin the man, it goes beyond that. It is, perhaps, a demonstration of the fact that objecting to political assassination or using a murder weapon against a political enemy has not penetrated Israel society.

Prof. Yedidya Stern: Whoever destroyed the monument said, Not only am I not part of the political camp of the late Yitzhak Rabin but, first of all, I am not part of the broader Israeli national consensus represented by this myth of Rabin. Second of all and more importantly, he is actually kicking sand in the eyes of all of us and saying, Look, this happened eight years ago and I'm doing it again. I don't want to but, essentially, I am doing the exact same thing. I'm taking what all you Israelis think is a major part of your perspective in the right place and at the right time so that really, the way you do it is justifiable. [Reshet Bet will devote almost all the rest of its news programs to this topic.] Because I say, gentlemen, I am opposed to all this togetherness. I have a different system of values. This system of values is valid for Israel society.

Haim Zisovich: And is this, in your opinion, a case where this display of tasteless and vulgar radical nationalism is, allegedly, the memory rather than the feeling of those who remember Rabin or who remember the assassination? Is this a case where these displays are being carried out in society's hotbeds of religion, or some of them?

Prof. Yedidya Stern: Look, I think that there are two elements here, and each of them is important and we cannot address only one of them. On the one hand, certainly there are portions of the religious public who are committed to other, extra-democratic systems, which they believe contradict democracy or, to be more precise, that democracy contradicts these systems. Such people have a Messianic approach to history and the facts don't necessarily interest them because they have their own plan with which they are very familiar, and it leads them to draw the necessary conclusions and, therefore, the facts don't matter so much. This is one type of problem. But it is important to recall that at the same time there is another type of problem, of a broader nature, and this is that the general Israeli commitment, the internal Jewish commitment and the Jewish-Arab commitment to democracy is very much on the wane. Perhaps those same ones who spray graffiti and desecrate monuments are doing us a favor by reminding us over, and over, and over again that we are in deep trouble. In terms of our commitment to democracy, it is shocking to learn that out of 32 countries where an index of democracy exists, we are in last place together - with only one other country - regarding the subject of whether a democratic regime is even desirable.

Haim Zisovich: Then again, with regard to opposition - not opposition to democracy, on the one hand people abuse the name of democracy, everyone talks about democracy. On the other hand, there is a willingness to break the law in order to promote a political idea, and this can be found on the fringes of the political right, but also on the fringes of the left.

Prof. Yedidya Stern: Certainly, I can quote you the figures regarding the position that a strong leader is better for a country than all the discussions and laws, that is, the rule of law - no less than 56% of Israel's residents agree with this. Every other person listening to us now agrees with that statement, certainly not only the religious or the left, and certainly not only the right - it's Israel.

Haim Zisovich: The ultimate question is, apart from our hurt feelings and apart from the desecration of the man's memory, is today's atmosphere preparing us once again for a radical act such as political assassination?
Prof. Yedidya Stern: I don't know how to answer that question because it is clear that the preparation does not exist, but the possibility almost certainly does exist. Perhaps we should relate this to what I heard you say at the beginning of the program, when you talked about the verses from this week's Torah portion. I want to remind listeners that in the portion of Noah, God promises us that he will never bring another flood upon the world; human existence is assured. From a religious perspective, this promise is connected to the rainbow. What is a rainbow, and what is the internal connection between the rainbow and the promise of existence? The rainbow is composed of different colors, and although each one is different from the other they all blend into the other. If we were to place all of the colors one on top of the other, that is, if we wanted uniform ideas, the result would be black. The fact that we actually don't agree with one another and can still be part of the same rainbow is the essential promise for our continued existence. If someone comes along and thinks differently he allows himself to perform violent acts whose most dramatic outcome is to jeopardize Israel's sovereignty via political assassination or killing the prime minister. Is this possible? Yes, very possible. Have we done enough to prevent it? Certainly not. Can the answer be found through the rule of law? Certainly not. The answer lies within the education system, and on the religious level, the public level. The resources we allocate for teaching democracy are much lower than we would want them to be, lower than what they should be given our serous situation. Our national security is in jeopardy because of such allocations.

Haim Zisovich: Prof. Yedidya Stern, I thank you very much and Shabbat Shalom.

Prof. Yedidya Stern: Shabbat Shalom.

Haim Zisovich: We here at Reshet Bet of the Voice of Israel want to remind you that tomorrow, beginning at eight o'clock, we will be broadcasting live the gathering at Rabin Square in memory of our late prime minister who was assassinated.

Constitution by Consensus and the Israel Democracy Institute
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NIS 4,500,000,000
That's the price of three election campaigns in five years!
That's the price of unstable government!!

Tuesday, December 10, 2002

This evening, Constitution by Consensus and the Israel Democracy Institute (IDI) are launching a new campaign to put promoting the drafting of a constitution agreed on by all of Israeli society's various sectors and strata on the political agenda during the election period.

Constitution by Consensus calls on the candidates running for Knesset to adopt the issue of a constitution and to help promote the constitutional move being led by Constitution by Consensus. In doing so, they would be placing at the disposal of the Israeli public a tool that would stabilize government (by regulating the method of elections and the way in which the elected institutions work), would determine agreed upon rules of the game that would constitute a basis for dialogue and would bridge the gaps and rifts that threaten to tear Israeli society apart.

The campaign will begin this evening with television spots, under the heading,
"NIS 4,500,000,000 - That's the price of three election campaigns in five years; that's the price of unstable government." At the same time, the campaign's ads will appear in newspapers and on various Web sites. The Constitution by Consensus campaign was created by the Bauman-Bar-Rivnai advertising firm, which undertook to promote this issue pro bono.

The campaign is another phase in a process that began nearly three years ago: We believe that in the reality that currently exists in Israeli society a constitution cannot be drafted without dialogue between the various parties and without a process of discussing and formulating agreements. Toward that end, about two and a half years ago the IDI established the Public Council for Drafting a Constitution, headed by retired Supreme Court President Meir Shamgar. The Council's composition was determined such that it would faithfully reflect the range of opinions and attitudes in Israeli society. It includes about 100 public figures, including politicians from all parties, judges, academics, heads of authorities, public servants and businesspeople, who represent all of society's sectors (Jews, Arabs, secular, religious, ultra-Orthodox, veteran Israelis, immigrants, etc.).

Council members include the following politicians: Tzipi Livni, Dan Meridor, Haim Oron, Michael Eitan, Talab al-Sana, Moshe Arens, Yossi Beilin, Muhammad Barakeh, Uzi Baram, Rabbi Moshe Gafni, Yitzhak Herzog, Matan Vilnai, Eliezer Sandberg, Naomi Chazan, Ahmad Tibi, Shaul Yahalom, Meshulam Nahari, Ofir Pines, Meir Sheetrit and Natan Sharansky.

At conferences held by the Public Council since its establishment, the various sections of the constitution taking shape were discussed. During the discussions, we saw that the gaps are not as wide as it may seem, and that it is possible to achieve consensus even on issues that appear to be impossible to bridge: for example, on issues of religion and state - between religious and secular, or on issues of religion and nationality - between Arabs and Jews.

We call on the 16th Knesset to adopt Constitution by Consensus and during its term to complete the process of legislating a constitution, which began with the founding of the state.

For further details and to see a preview of the campaign's ad spots:

Orit Reuveni, IDI Spokeswoman, 02-530-0864 or 051-545-425 (mobile)

Army & Society
The Army and Society Forum
Project Head: Prof. Baruch Nevo

Research Assistant: Sigal Sasson

The Army and Society project, established in November
2000, brings together the Chief of Staff and other high-ranking IDF officers with leading academics, individuals from the public sector and the media to examine the delicate relationship between the armed forces and the Israeli polity and explore new ways of achieving more sound and effective interaction.

The forum meets several times a year dealing with issues which are of mutual interest to the army and to society. The proceedings of each conference are published in book form.

Eight conferences that have thus far taken place, have resulted in three English books and six Hebrew ones:

1. Women in the Israel Defense Forces
5. The Army and the Press during Hostilities
6. Morality, Ethics and Law in Wartime

Additional Hebrew books:
2. Human Dignity in the IDF
3. The People's Army? The Reserves in Israel
4. The Contract between the IDF and the Israeli Society:
Compulsory Service
7. The IDF and the Israeli Economy (Forthcoming)
8. The IDF and Israeli Society Fighting Terror (Forthcoming)

Project Focus for 2004
Possible topics to be studied in 2004 include: ethical and legal issues in times of war against terror; the impact of three years of Intifada on Israeli society and on the IDF; socio-economic gaps in Israeli society and their implications on the army; a professional versus volunteer army; and the involvement of parents in their children's service.


Structural Reforms in the Israeli Economy

Head: Prof. Avi Ben-Bassat

Three-year Work Plan for 2004-2006

This new project focuses on three main topics: structure of supervision of the capital market, the national budget process and economic policy, and reform of monopolistic fields. After completion of the work on the first two topics, a central branch of non-competitive market structure (such as local media, ports, electricity, refineries, banking, insurance, etc.) will be evaluated.

Focus in 2004
The structure of supervision of the capital market: Five different authorities supervise the capital market in Israel, resulting in several problems which need to be discussed and resolved (e.g.: double supervision in some areas; an imbalance of supervision among similar activities and lack of unity in the means of supervision among authorities). Each authority's tasks and responsibilities will be compared to those of their counterparts in western democracies, and alternative models will be examined for their appropriateness to Israel.

The national budget process and economic policy: Israel's budgeting process incorporates input from many different authorities and bodies. The existing process will be analyzed and its advantages and shortcomings considered and compared with the situation in other countries.

Publications in Preparation during 2004
A report on "Capital Market Supervision."

Conferences Planned for 2004
Two conferences on Capital Market Supervision (Dec. 2004).
A conference on a topic and date yet to be announced.
Religion & State

Project Directors:
Prof. Aviezer Ravitzky and Prof. Yedidya Z. Stern
Research Team:
Dr. Yitzhak Brand
Mr. Yossi David
Mr. Shuki Friedman
Mr. Yohai Ofran
Dr. Amihai Radzyner
Mr. Yair Sheleg

Project Description
The relationship between religion and state is one of the most crucial issues in the cultural and political life of Israeli society. It creates political parties, topples governments and takes center stage at any public debate on the constitution, law or civil rights. In addition, it is at the core of the argument concerning Israel's national identity and culture and puts a decisive stamp on its relations with the Diaspora, in the shape of the Law of Return and the Conversion Law. It can safely be assumed that the relationship between religion and state will continue to present a source of problems and controversy - at the communal, legal, ideological and existential level - in the future. The Israel Democracy Institute is therefore examining alternative approaches and models with relation to this issue, on the basis of Jewish and Western sources, with the aim of offering new solutions and perceptions. At the same time, the Institute is also examining the social and ideological tensions that arise from Israel's constitutional character as a state that is both Jewish and democratic.

The issues to be tackled in the upcoming period are separation of religion and state, which is a continuation of previous years' efforts; separation of nation and state and separation of nation and religion, which are new dimensions of the previous issue.

Prof. Ravitzky's topics include:

* The question of Jews and non-Jews in the State of Israel: The problem of a nation-state in the 21st century has become particularly acute in Israel, whose population includes Arabs, foreign workers, new Jewish and non-Jewish immigrants, and ultra-orthodox Jews who are against the idea of a Jewish nation-state. The theoretical, historical and Halakhic aspects of various scenarios of possible models of co-existence or multi-existence in a sovereign state will be researched.

* Religion and state in contemporary Jewish thought: This project, which is meant to deepen social discourse about religions and state and offer a variety of models from traditional sources, will continue.

Prof. Ravitzky and Prof. Stern jointly address:

* Penetration of Halakha into Israeli law. An in-depth examination of this topic will be carried out. What are the differences between this phenomenon and religious law; between traditional content and traditional language; between cultural influence and religious coercion?
Separation of religion and state: In addition to the question of the separation of religion and state, two questions have recently been included in the public discourse: separation of nation and state and separation of nation and religion. These three questions deal with the fundamentals of identity and culture and the project will conduct in-depth research on these topics, from their historic and cultural aspects, and will offer possible models for an independent Jewish society in modern times.

Prof. Stern's topics include:

* Law and Halakha: The cultural disputes that exist in Israel become dangerous when they are translated into normative disputes between the law and Halakha and this struggle poses harsh consequences for democracy and Judaism alike. The role of Halakha and religious legislation will be examined and analyzed on the basis of liberal philosophy.

* Secularism and Halakha: One of the main points of tension in Israeli society is the non-acceptance by religion of secularism. Research in this field will propose a fresh Halakhic attitude towards secularism that may facilitate a major breakthrough in religious-secular relations.
State and Halakha: A secular Jewish state is a new phenomenon and Halakhic authorities are thus hard-put to formulate Halakhic positions on the implications of a secular state and its institutions, and often take a critical and antagonistic stance towards the state. This creates dissonance for the religious polity on the one hand, who are committed to Halakha as interpreted by the Halakhic authorities, and the state on the other hand, which is dominated by a secular majority.

Law and Halakha. The project will explore, analytically, historically and socially, the role that Halakha could and should play in times of religious and state crises. Two alternative models to the current model of coercion through religious legislation will be presented. Each will be analyzed from a democratic, religious and social standpoint.
Secularism and Halakha. Religion's attitude towards the secular individual is expressed in religious legal terms that carry grave normative ramifications. The project offers a new Halakhic attitude towards secularism that could transform religious-secular relations.

State and Halakha. The project hopes to reveal the penetration of religious-Halakhic concepts into various governmental institutions - the courts, the Knesset, various entities of the executive branch, etc.

Publications in Preparation during 2004
Seven position papers:
"The Tension Between Religion and State: The Role of Halakha"
"Religious Legislation: the Dream, its Shattering and its Future"
"Halakha and Secularism: History and the Present."
"Non-Jewish Immigrants in Israel"
"The Paradox of Jewish Theocracy"
"Jewish Religion and World Religions"
"Language and Religious Law"

"Theology and Politics" by Joseph E. David.
"Rabbis and their Attitudes to Democracy and Liberalism" by Yair Sheleg.
A compendium of articles on "Judaism and Democracy and Democracy: Culture, Society, and State," edited jointly by Prof. Stern and Prof. Ravitzky.
How to Get Here

The Israel Democracy Institute is located in the neighborhood of Talbieh, at 4 Pinsker Street, Jerusalem 92228. Mailing address: POB 4702, Jerusalem 91046.

Telephone: 02-530-0888 Fax: 02-530-0837

The Publications Department and the Project for a Constitution by Consensus are located at 2 Sokolov Street, corner of Keren Hayesod, Jerusalem 92144. Mailing address: POB 4482
Jerusalem 91040.

Telephone: 02-566-7989, 1-800-20-2222
Fax: 02-563-1122

Posted by maximpost at 5:02 PM EST

Steely-Eyed Recovery
The Fed should get on board with this economy.
A story in the Wall Street Journal this week said that GM finally decided to pay higher steel costs to its suppliers instead of hauling them off to court. The story is apocryphal. Suing steel makers is a really stupid idea. And what's a raw-material supplier to do anyway?
Plentiful liquidity at home and the China boom abroad have worked to raise all raw-material prices and costs. The Commodity Research Bureau's spot index of raw materials has gained about 25 percent over the past year, recouping about 90 percent of its losses since the mid-1990s peak. As for the case above, hot-rolled steel has nearly doubled in price this year, from $330 to about $600. Steel, as with other basic materials, is booming.
Steel-using manufacturers like GM really have only two choices: They can pass the cost increases along to consumers in the form of higher car prices, or they can internalize these costs by accepting lower profit margins. The auto business is brutally competitive, so it's doubtful consumers will eat the full price increase. Foreign carmakers, especially Toyota and Honda, are picking up market share by keeping quality high and costs low.
So, how is GM to stay competitive? The same way everyone else is.
U.S. manufacturers across the entire spectrum are using big productivity gains of nearly 6 percent to reduce costs and raise profits. The spread, or difference, between unit prices and unit costs is therefore unusually wide -- and profitable. This profit spread, as much as any other variable, has driven the stock market higher over the past year. Once the current market correction has run its course, share prices should continue to rise as a result of unexpectedly strong profit gains (and steady low interest rates).
If only the Federal Reserve got all of this.
The central bank's latest policy statement equated deflation and inflation pressures, which is false and misleading. Deflationary pressures are gone and raw-material price increases are showing up everywhere. But that doesn't mean a big inflationary rise is imminent.
After roughly two years during which the value of the dollar declined relative to domestic commodity prices and foreign-exchange currencies, deflation is a thing of the past. In all likelihood, future core inflation will gradually creep upward, from less than 1 percent today to something less than 2 percent. The Fed should acknowledge the likelihood of this outcome by writing it into their policy statements.
By the same token the central bank should inform the public that the risk assessment between recession (a thing of the past) and recovery (the business at hand) is no longer balanced. Recent increases in industrial production and factory shipments show clearly that a business boom is in the cards. Lower taxes and higher mortgage refis will continue to propel consumer spending. Gains in gross domestic product between 4 and 6 percent will also be sustained.
Clearly, the Fed has reverted back to a Phillips-curve trade-off between unemployment and inflation as their guiding lodestar in policy setting. This worthless model ignores the powerful price effects of money supplied by the government bank relative to money demands from the economy. Even though lower tax rates, record productivity, and strong economic growth are absorbing liquidity, rising commodity prices suggest that excess money is around.
The economic power of money has been increasing as the rate at which money changes hands inside the economy -- commonly referred to as velocity -- continues to pick up. This recovery of monetary turnover is also an important signal that the threat of deflation has passed.
Financial markets know full well that a 1 percent fed funds policy rate is completely out of line with a rapidly recovering economy. The Fed is playing cat and mouse with respect to the timing of future interest-rate hikes. The longer this duplicitous game continues, the greater the chance the central bank's poorly baited trap will ensnare traders and investors into large losses.
It's not going to happen, but a far better approach would be a ? percent rise in the fed funds rate this spring, followed by another in the summer. That would still leave a miniscule 1? percent policy rate, something that would not interfere with either stock market or economic recovery. But it would better inform investors, businesses, and consumers about the value and price of their money.
The wise heads at the Fed are always talking about the need for greater policy transparency in emerging economies around the world. Honesty is a virtue. How about starting right here at home?
-- Larry Kudlow, NRO's Economics Editor, is CEO of Kudlow & Co. and host with Jim Cramer of CNBC's Kudlow & Cramer.

>> WHY - OH WHY?

Postwar rebuilding falters over contracts
By Anne Barnard and Stephen J. Glain, Globe Staff, 3/24/2004
BAGHDAD -- Colonel David Teeples, commander of the Third Armored Cavalry Regiment in Iraq, can't figure it out. If he can recruit and train members of Iraq's new security force, why can't the Coalition Provisional Authority -- the US-led administration that is running postwar Iraq -- provide them with the uniforms, radios, weapons, and vehicles they need to do their job?
His frustration is common in postwar Iraq -- among Iraqis as much as US forces. More than a year after the US government secretly divvied up the first contracts for postwar reconstruction, much of the subcontracting process remains confusing, overcentralized, and fertile ground for corruption, say watchdog agencies and Iraqi contractors. The equipment so important to Teeples and his recruits, for example, was supposed to be provided under a $327 million contract that was issued in January but was canceled two weeks ago over what the Army said was errors made by contracting officers.
The list of reconstruction contracts and licenses either delayed or under investigation is growing due to what watchdog agencies say is an ad hoc and underregulated selection process. And analysts say it is likely to become more prone to abuse if the United States transfers control over Iraq to an interim government without a strong oversight agency.
"They're still far from an open bidding process," said William Hartung, who recently testified to Congress about postwar reconstruction as a director at the World Policy Institute, a New York-based research center. "The contracting has been chaotic and there are still a relatively small number of companies in a position to benefit."
Pentagon officials acknowledge confusion over the way some subcontracts have been awarded, but say they are working to make the process transparent. "We're putting all the information out there," said Steven Susens, spokesman for the CPA, adding that all applicants meet US standards, with sealed bids. The United States says it will by June 30 transfer sovereignty over Iraq to a local government. With the deadline approaching, charges of cronyism are proliferating as links emerge between winning bidders and Iraqi officials. While allegations of overcharging related to work done by US oil-giant Halliburton Co. have drawn media attention, other less publicized deals and alleged conflicts of interest are raising eyebrows in the United States and Iraq.If coalition efforts to win Iraqi hearts and minds hinge on the integrity of the rebuilding process, the Americans have already lost ground, say Iraqi contractors. Frustration over the country's high unemployment and the slow pace of reconstruction has intensified, they say, because of the perception that foreign companies and a cabal of Iraqi exiles are snatching the best deals. So exasperated are many Iraqis with the contract awards process that many compare it unfavorably with the abusive business practices that flourished under Saddam Hussein's regime. At least back then, Iraqis say, it was clear whom to bribe.
"In the Saddam regime, there was one family, the Tikritis, and you could deal with them," said Kadhim Mohammed al Janabi, who runs a contracting and oil transport company. "Now there are more than 120 parties, plus the people who came from abroad."
Iraqi contractors lament what they say is a bias that favors foreign companies and well-connected Iraqis who spent years living abroad before returning after Hussein's removal. Many members of the Iraqi Federation of Contractors say the winning bids for subcontracting work often go unannounced, which only fuels suspicions of abuse.
"People who have no relation to the coalition or didn't come from abroad don't get any contracts," said Janabi. "It's not clean work."
Those Iraqis who have landed subcontracts say they were helped by their English-speaking skills or personal contact with coalition officials and their translators. Basem Salim and Sami Abdullah say they were awarded a subcontract, finished the contract job quickly, and were rewarded with a larger order to rebuild a police station. But the bidding process is arduous, they say, requiring long trips to a web of contracting offices at military bases or inside the Green Zone -- the coalition's closely guarded headquarters based in Hussein's old Republican Palace.
The Pentagon has opened a central contracting authority in Baghdad, called the Program Management Office, to better manage the rebuilding process. Officials there will oversee how the $18.4 billion approved in October by Congress to fund Iraqi reconstruction will be spent. Last week, the office awarded contracts worth $108 million to companies that will monitor and coordinate design and construction projects.
While government contracts will be handled by Iraqi ministers after June 30, it is not clear what kind of anticorruption safeguards they might adopt. The office will manage US-funded projects for about two years after the hand-over, according to US officials.
Enhanced oversight, say analysts and contractors, is vital to prevent the kind of setbacks dealt by the canceled military supply contract for Colonel Teeples's trainees, which was originally awarded to a Virginia-based company with close ties to Ahmed Chalabi, a prominent member of Iraq's interim ruling council.
The company, Nour USA Ltd., was formed last year specifically to bid on Iraqi reconstruction work and had no previous experience in military provisioning. It beat out 18 other companies for the contract, including Poland's Bumar Group, a state-run arms company, as well as US defense giants Raytheon Co. and General Dynamics Corp.
Nour's president, A. Huda Farouki, has acknowledged that he is a friend of Chalabi's, but he has denied such associations played a role in the award, and he dismissed criticism as sour grapes by competitors.
A new tender for the contract has been scheduled, according to the Defense Department, and could take months to process.
"What is frustrating to me is that a lot of the CPA's resources were tied up in contracts" that were controlled centrally from Baghdad, Teeples said in a recent telephone interview. "What they need is a budgetary process to decentralize and get funds out to the provinces."
In late November, according to the Financial Times newspaper of London, the Pentagon froze licenses worth hundreds of millions of dollars issued to build three cellphone grids in Iraq. The paper said the ensuing probe, which held up cellphone service for months in a country with few working land lines, followed allegations of corruption involving Iraqi government officials and the three Arab consortia that won the licenses. Iraqi Minister of Communications Haider Jawad al-Ebadi denied in an interview last week that the cellphone networks were stalled by a corruption probe, and instead blamed the coalition for failing to provide his ministry with timely assistance in the tender process.
Last month, a watchdog group reported that Iraq's interim government sold much of the country's air industry to a Jordanian firm and a prominent Iraqi family that had little experience in commercial aviation. The New York-based Iraq Revenue Watch said Iraq's transport minister secretly awarded a license for the creation of a new airline and related industries without the knowledge of US officials. A senior coalition official, speaking on condition of anonymity, said he was aware of the Iraq Revenue Watch report and the contract on which it was based. "We'll get to this matter in due course," the official said by email, "or when the mainstream press makes news of it, whichever comes first."

? Copyright 2004 Globe Newspaper Company.


At Iraqi Port, Progress Is Matter of Perception
U.S. Role Disappoints Dockworkers
By Ariana Eunjung Cha
Washington Post Staff Writer
Thursday, March 25, 2004; Page A01
UMM QASR, Iraq -- A year ago, the capture of this port by U.S. and British troops was celebrated as the first victory of the Iraq war. Today, the U.S.-led occupation authority points to Umm Qasr's $98 million rehabilitation into a bustling center of commerce as one of the first victories of the reconstruction.
Tanker ships unload colorful containers full of cigarettes, powdered baby milk and television sets in quantities unseen in Iraq in decades. Grizzled sailors from all over the world share stories over pots of tea. Businessmen and tourists struggling with suitcases spill out of passenger ferries.
But ask an Iraqi and chances are you'll get a different view.
"Nothing's changed," maintained Hamdi Abdul Rahim, a senior engineer at the grain processing plant next to the port. "There has been no improvement," said Saddam Abdul Karim, an accountant for an import-export company. "Just maintenance. That's all they did," said Falah Habsi, a director general at the Iraqi Transportation Ministry who is charge of reconstruction projects.
After billions of dollars of Iraqi money and foreign aid have been spent and thousands of consultants brought in, the Coalition Provisional Authority can point to a long list of tangible accomplishments. But occupation officials say one of the biggest challenges they have had to confront is convincing Iraqis that the right things are being done for their country -- and for the right reasons.
According to occupation and Iraqi ministry officials, telephone access is now 20 percent greater than before the war, thanks to a new cellular network. For the first time in years, schoolchildren have received new math and science textbooks, about 60 million of them. Water and sewage treatment plants that in the recent past have done little to contain the spread of disease are being repaired. Provincial cities that were once without power 24 hours a day are now receiving some electricity. Wages have increased tenfold or more for some government workers. And a in poll released this week by ABC News, most Iraqis interviewed said their lives had improved since before the war.
Yet Peter Bingham, the Coalition Provisional Authority's senior adviser on maritime issues, said it may take years before the full value of the work that has been done becomes clear to Iraqis. He said an overhaul was necessary to rid the country of the favoritism, corruption and dependence on the state that dominated life during President Saddam Hussein's rule.
"We are just finishing the foundation," Bingham said, "and the bricks are just starting to become visible."
Ideals and Reality
When the U.S.-led Coalition Provisional Authority arrived in Iraq last spring, it had all sorts of ideas about the principles the country should embrace. Some were as technical as environmental protection, worker safety and open accounting practices, others as philosophical as equality, integration, women's rights and capitalism. Hiring consultants and advisers to spread those values to the Iraqi people, the occupiers sought not only to rebuild, but to remake.
The immediate effect, at least in part, has been to slow the progress of the reconstruction. Power struggles, both small and large, have erupted, pitting foreign advisers and some Iraqi government officials against other Iraqis who have their own ideas about the shape of the new Iraq.
The occupation authority made sure electricity was distributed fairly around the country, gaining the support of those in the countryside but angering many Baghdad residents who were used to getting more than their share. It tried to integrate Arabs and Kurds in the army, pleasing those who want to mend Iraq's ethnic divisions but creating more tensions among those who prefer separation. It elevated women to positions of power, drawing applause from women's rights groups but spurring protests from some influential Islamic clerics. It sought to scale back food subsidies, winning the support of those who wanted to move away from a socialist economic model but provoking the ire of some Iraqis who felt the situation was too dire for such a move.
At Umm Qasr, the tension has been over the role of the state-owned Iraqi Port Authority in what occupation officials envision as a capitalist Iraq. Should the government continue to manage it? Should an outside company should take over its management? Should it be privatized and sold to the highest bidder?
As debate continues over how to spend the next round of $18.6 billion that Congress has allocated to the reconstruction, a key question is whether the ideological overhaul is the best strategy or whether the occupation instead should focus on quick, high-impact fixes. Occupation officials acknowledge they may have overestimated their ability to change Iraq's culture, just as they underestimated the deterioration of its infrastructure and the impact that security concerns would have on the pace of reconstruction. But they say they will not retreat from their ideals.
The battle for Umm Qasr, located on a canal that opens onto the Persian Gulf a few miles from the Kuwaiti border, was one of the iconic moments of the war. Invasion forces arrived March 20, the first day of the war, planted an American flag and declared the town would fall within hours. Days later, they were still fighting.
On March 27, the port was declared secure -- for the fourth and final time -- and a reconstruction survey team was dispatched immediately. Analysts from the Pentagon and the U.S. Agency for International Development had determined that the port should be among their highest priorities for repair. The three-mile strip, by far the largest of five ports in Iraq, would be critical for transporting military, humanitarian, reconstruction and commercial supplies.
The assessors found Umm Qasr badly damaged. Administration buildings had been looted after the invasion, but the rest of the facility showed years of neglect. No fewer than 40 wrecked ships bobbed in the waters, and silt had gotten so high that it was impossible for large ships to dock. The port's finances were a mess, and employees were lazing around confused about what to do. No one was manning the cranes, and docks were devoid of ships.
Fergus Moran, the project manager for Stevedoring Services of America (SSA) remembered, "It looked like a port, smelled like a port, but it didn't operate like a port."
The occupation adopted a two-pronged approach for rehabilitating Umm Qasr. It hired Bechtel Corp. for the technical work of dredging, removing wrecks and fixing equipment and buildings. SSA would manage the port and teach and mentor the Iraqi Port Authority.
SSA said it would need $162 million to fix the port; Bechtel estimated its costs at $400 million. The companies got $14 million and $38 million, respectively, and were told to do what they could. The U.N. Development Program assisted in emergency dredging and shipwreck removal with a $2.5 million donation from the Japanese government and $43.5 million from the Iraqi oil-for-food program. The port was up and running by June 16, and emergency dredging and wreckage removal was finished by the fall.
Much of the work since then has focused on making the state-owned port company run like a modern business rather than the sluggish socialist entity it was, with an eye toward the day when it might be privatized in a newly capitalist Iraq. The U.S.-paid companies helping port managers have imposed new controls on finances to better track the money going in and out. They have trained workers in leadership and business practices. And they have cracked down on corruption, which under the Hussein government held up shipments for weeks or months.
A Relative Peace
On a recent weekday at Umm Qasr, the achievements and challenges of the reconstruction were sitting, walking and talking.
Muhammed Diyab, a security guard at the port, was at the main gate, scanning the lines of truckers who had just awakened and were preparing for the long trip to Baghdad, which they no longer make at night for fear of kidnappings and hijackings. A few days earlier, Diyab had caught some men running away with stolen bags of sugar, and he was worried others might be eyeing the rows of white pickup trucks being prepared for delivery to some ministry.
In all, more than 240 Iraqi Port Authority police patrol the area, showing off the dozens of AK-47s they recently acquired after sharing four guns among themselves for months. In addition to smuggling, the port has had five fires, and security patrols have found 17 bodies around the complex since the war. Even so, the port is safer than other parts of Iraq. Foreign officials with the occupation authority and contractors roamed around without flak jackets or escorts.
The relative peace has allowed commerce to flourish. A renovated processing facility has received 200,000 tons of wheat and other grains, critical to feeding the country as its agriculture industry continues to struggle.
At the passenger terminal, about 500 Shiite Muslims from India and other pilgrims coming to visit Iraq's shrines were leaving their cruise ship and passing through an immigration check to the luggage pickup area.
After 40 hours at sea, they had been confined to the ship for 24 extra hours until dockworkers could be found to let them off. Now they were stuck waiting another four hours for their luggage.
"We went to ship manager and asked who is in charge. He said he didn't know. I asked someone else at the dock and he didn't know either," said Ali Shamary, 37, an Iraqi American who was visiting with six other members of his family from Seattle.
At the old port where smaller ships dock, Saad Hanesh, 26, and four other truck drivers were preparing wads of cash to hand out as bribes. They said they used to pay about $220 for each trip they would make to Baghdad. Now they say they pay less than $20.
"It's normal," Hanesh said with a shrug. "We have paid bribes since Saddam's time. Before, we knew the bribes went to Saddam. Now everyone's working for himself."
Salaries Delayed Again
Nearby, dock employees milled about in small groups, whispering about whether they should launch another strike. In January, after their salaries were delayed for two successive months because of an administrative glitch, the workers briefly refused to work and threatened to close the port. After some pleading and promises from managers, they returned to their jobs. Now their salaries were late again.
Najm Abid Sakr, 44, a finance manager for Umm Qasr, said he appreciated the freedoms of the new Iraq but said that under Hussein's government at least he was paid on time. He said he worries about the occupation's plans -- if the port were privatized and the owners could not make money, what would happen to him and the other workers? "We were hoping for good things, but after a year we are already disappointed," he said.
With the salary problems, the management overhaul, a threat by the provincial governor to take over the port, the accumulation of bids from companies that want to privatize Umm Qasr and the imminent end of SSA's contract, rumors were swirling about the future of the port. Workers were uneasy.
They knew that SSA's financial review showed the port was profitable: It had $1 million a month in revenue and $800,000 in operating expenses. But further investigation revealed more layers of corruption than anyone imagined. Auditors were going through employee rolls and finding names of people who weren't showing up for work, people who had died years ago and people who didn't exist. In all, they estimated that as many as 1,000 of the 3,600 people on the payroll were not doing any work.
Meanwhile, the main administration building was full of local dignitaries discussing how Umm Qasr should be run in the coming months. The port manager, Capt. Adel Khalaf, who has spent 27 years in maritime work and was trained in Yugoslavia, met with occupation officials and said he told everyone that he enjoyed a good relationship with the SSA team and was grateful for its manpower. But he also said he felt its value to the port had been "providing us with moral support and self-trust" at a critical time. The port authority, he said, was ready to work on its own.
"We know our work very well. What we need is new technology and new information," Khalaf said. "Then we can be independent and do the work ourselves."
Over the next year, the port has been promised $5 million for management services and $40 million for infrastructure from the U.S. government, plus about $7 million from the British government for dredging. Khalaf said the money earmarked for administrative support would be better spent on physical improvements.
Occupation officials disagreed, saying they would like an outside company to continue managing the port until the June 30 handoff to a sovereign Iraqi government. Craig Hautamaki, a USAID official who oversees the port, said foreign advisers are necessary because they teach such things as fiduciary responsibility, capital investment, contractual practices, human resources planning and international standards for checks and balances.
By the end of the day, Khalaf and the occupation officials were still deadlocked. But the Coalition Provisional Authority concluded it knew what was best for Iraq. The foreign officials made plans for Stevedoring Services of America to continue its work at the port.

? 2004 The Washington Post Company

Pentagon Faults Supervision Of Contracts

By Jackie Spinner
Washington Post Staff Writer
Thursday, March 25, 2004; Page A19
The Pentagon's inspector general has criticized the management of some contracts awarded by the Defense Department immediately following the U.S.-led invasion of Iraq last year.
In a report dated last Thursday, the inspector general found that procurement officers "circumvented procedures" by not following established federal guidelines and did not provide proper oversight once the contracts were awarded.
The report found that one contractor -- San Diego-based Science Applications International Corp. (SAIC), which has offices in McLean -- chartered a cargo jet to fly an H2 Hummer and a Ford C350 pickup truck to Iraq after its plan was turned down by a contracting officer. SAIC, which was under contract to provide media support to the Pentagon's reconstruction office, "went around the authority of this acquisition specialist to a different office . . . to gain approval and succeeded," according to the report, which recommended that the company repay the government $634,834 for unsubstantiated costs.
Ronald M. Zollars, a spokesman for SAIC, said the company had not seen the report.
"SAIC has worked very diligently to ensure hat we are performing to the customer's satisfaction," he said. "When unanticipated events occur, we immediately respond to address and resolve any issues."
The inspector general reviewed 24 contracts valued at $122.5 million awarded by the Defense Department on behalf of the U.S.-led occupation authority in Iraq.
"DOD cannot be assured that it was either provided the best contracting solution or paid fair and reasonable prices for the goods and services purchased" for 22 of the 24 contracts, the report said.
Thirteen of the 24 contracts were not competitively awarded, according to the report, including eight to SAIC valued at up to $108.2 million.

Bremer Forms Boards to Aid Iraq Transfer
Associated Press Writer
BAGHDAD, Iraq (AP) -- With fewer than 100 days until power is handed over to Iraqis, the top U.S. administrator said Wednesday he was establishing several Western-style institutions that are expected to put a moderating influence on the fledgling government that takes over June 30.
Guerrillas in Fallujah, west of Baghdad, ambushed an American patrol, and three civilians were killed and two soldiers were wounded, in the latest sign that security could remain a problem in Iraq for months to come.
The fighting came a day after attacks on Iraqi police and recruits left a dozen dead.
Top administrator L. Paul Bremer said significant steps had been taken to rebuild the country since the U.S.-led invasion toppled Saddam Hussein a year ago.
"One hundred days from now, Iraqis will be sovereign in their own land and responsible for their own future," Bremer said in an outdoor speech in the Green Zone, the heavily protected area housing coalition headquarters in central Baghdad.
Bremer said he would set up an Iraqi Defense Ministry and a national security Cabinet later this week.
He said he was in the midst of appointing inspectors general to each of Iraq's 25 government ministries, while also creating a government auditing board and an anti-corruption commission. Bremer said work was under way to establish a public broadcasting service and an independent panel to regulate it.
Bremer has already appointed most Iraqi ministers, many of whom are expected to keep their jobs after the handover. He is sorting through the ministers' choices for deputies.
U.S. troops came under attack in Fallujah a day after assailants killed nine police recruits south of Baghdad, while gunmen killed two policemen in the north.
On Wednesday, in the southern province of Babil, a district police chief was shot and killed on his way to work. The slayings were the latest to target police and other Iraqis who work with the U.S.-led occupation.
On the eastern outskirts of Baghdad, three civilians - a 3-year-old boy, his grandmother and a male relative - were killed when a mine exploded and destroyed the car they were riding in, according to relatives. Six other people were wounded in the blast.
North of Baghdad on Tuesday, a U.S. military vehicle in a convoy fatally struck an Iraqi girl near Balad, and four American soldiers and two Iraqi civilians were injured in a separate accident involving two military vehicles near Tikrit, the U.S. military said. The soldiers were in stable condition, and the condition of the Iraqis was unknown.
U.S. and Iraqi officials expect Iraqi guerrillas and foreign fighters to step up attacks in coming weeks, to try to disrupt the handover process and demonstrate that a fledgling government cannot control Iraq.
"The security issue cannot be overemphasized," said Mouwaffak al-Rubaie, a Shiite Muslim member of the Governing Council. He said newly trained Iraqi police would do their best to stabilize Iraq alongside 110,000 U.S. troops.
Enormous tasks remain. The biggest involves anointing an Iraqi transitional government that will take power June 30 - but the Governing Council and U.S.-led occupation figures have yet to agree upon a plan to name those who will govern.
"We're moving at rocket speed," al-Rubaie said. "The counting down has started."
Al-Rubaie said a U.N. team would arrive Thursday to look at technical issues surrounding the transfer of sovereignty. A second U.N. delegation, headed by top negotiator Lakhdar Brahimi, is expected in about 10 days, al-Rubaie said.
Bremer, who often says he was tapped to run Iraq on two weeks' notice last spring, is clearly glad to be handing off his responsibilities.
"It will be a happy moment for all Iraqis - and an even happier moment for my family," Bremer told a few dozen Iraqi dignitaries, seated in the shade of rustling date palms. As he spoke, Bremer's heavily armed security guards scanned the crowd and nearby buildings, as surveillance helicopters circled overhead.
Bremer cited the signing of an interim constitution as a key step toward the June 30 handover of power from the coalition to Iraqis.
He acknowledged some Iraqi leaders were not fully satisfied, but praised members of the U.S.-appointed Governing Council for making compromises on a document that he said enshrines religious freedom and other basic rights.
"Iraq is now on the path to full democracy in a united state at peace with its neighbors," he said.
U.S. troops are fighting a deadly insurgency that sprang up shortly after Saddam was toppled, and the American military is expected to remain long after June 30. Nearly 600 American troops have died during the war and occupation.
Copyright 2004 Associated Press. All rights reserved.
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Bush chided for oil prices
By Patrice Hill
The Bush administration was criticized yesterday for not acting to curb escalating oil prices even as the price of gasoline at the pump rose to a record high nationwide.
At a hearing of the Senate Armed Services Committee, Energy Secretary Spencer Abraham said the administration would not temporarily stop filling the Strategic Petroleum Reserve to help lower oil prices and it would not publicly call on OPEC to roll back production cuts scheduled for April 1.
"We've ... made clear we're not going to beg for oil," said Mr. Abraham, although he later told reporters that the administration has been working behind the scenes to try to bring prices down.
"We have had a lot of contacts at a lot of levels," he said.
"We're not begging," said Sen. Edward M. Kennedy, Massachusetts Democrat. "We have men and women over there" in Iraq.
Iraq has the world's second-largest oil reserves after Saudi Arabia. The slow revival of exports from Iraq, despite U.S. control of the country, has been a factor driving up oil prices.
Mr. Kennedy and other committee Democrats said they were outraged that the administration is not doing everything in its power to alleviate the strain on drivers, consumers and businesses.
AAA announced yesterday that the price of regular-grade gasoline hit a record at about $1.74 a gallon, though the country is still months away from the peak summer-driving season, when gas prices normally are highest.
Average gas prices in California and some other states already are well above $2. The record gas prices reflect sharp increases in the price of crude oil, which hit a 13-year high of $38.15 a barrel last week in New York trading.
Many analysts expect both gasoline and oil prices to establish records in the months ahead, in a trend that economists say poses trouble for the still-uncertain economic recovery.
"It's an intolerable position," Mr. Kennedy said. "No one can understand it ... why the president of the United States isn't jawboning OPEC."
Some ministers in the Organization of the Petroleum Exporting Countries recently have suggested they may defer next week's 4 percent production cut because of unexpectedly strong growth in demand for oil in the United States and China. Other ministers, enjoying the boom in oil revenue, are resisting any change.
In announcing the cuts last month, OPEC -- which controls about one-third of the world's oil -- said it was expecting consumption to wane in the spring, as it has in the past, between the high-consumption winter-heating and summer-driving seasons.
Energy analysts say it is extraordinary that gas is hitting a record high during the customary spring lull in the oil cycle, and it does not bode well for the summer.
That is when vacationing families drive consumption to peak levels in the United States and pressure on gas prices escalates because of the need for super-refined and clean fuels mandated by federal and state pollution-control laws.
California, New York and some other states have imposed stringent new requirements for summer-grade gasoline this year that will drive the already-high prices in those states to unprecedented levels -- some say near $3 a gallon.
As a partial remedy, many in Congress have suggested a temporary halt in the government's program of filling the Strategic Petroleum Reserve, which is 93 percent full. The Senate passed a resolution calling on the administration to do so in its budget earlier this month.
In a sign that the move could help alleviate the pressure on oil prices, crude prices dipped about $2 the day the Senate passed the resolution, but resumed their climb in the next trading session when the administration made clear it would not heed the suggestion.
"We have placed the national-security factor at the top of the list of considerations," Mr. Abraham said yesterday, explaining the administration's position. He added that the Bush administration believes the reserve "is not to be used to manipulate prices."
But Sen. Carl Levin questioned whether the diversion of 150,000 barrels a day into the reserve is appropriate at a time when private oil inventories -- at 281 million barrels, less than half the level of the 645 million-barrel reserve -- are substantially below normal. Low inventories have been a major factor driving oil prices sky-high.
"Of course this is a national-security issue," the Michigan Democrat said.
"Our economic security is important, too," he said, noting that high oil prices are acting as "a drag" on growth. He said oil prices could drop as much as $8 a barrel if the administration stopped stockpiling.
Mr. Abraham countered that a study by the independent Energy Information Administration found that the price effect of the government's oil diversion is "negligible."
Sen. Jeff Sessions, Alabama Republican, said Democrats complaining about high gas prices should stop blocking drilling in the Arctic National Wildlife Refuge and other domestic reserves.
"The Alaska reserves, which are substantial, ought to be brought on line," he said. The House has passed energy legislation authorizing drilling in the Alaskan reserve, but the Senate has not.
President Bush repeated his call yesterday for Congress to complete action on the energy legislation.

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