Cyclopedia Of Economics

IIIc. Encouraging Labour Mobility

Workers are encouraged to respond promptly and positively to employment signals, even if it means relocating. In many countries, a worker is obliged to accept any job on offer in a radius of 100 km from the worker's place of residence on pain of losing his or her unemployment benefits. Many governments (e.g., Israel, Yugoslavia, Russia, Canada, Australia) offer the relocating worker financial and logistical assistance as well as monetary and non-monetary incentives.

The EU is considering to introduce standard fixed term labour contracts. They would reduce the insupportable costs and simplify the red tape now involved in hiring and firing. The only country to buck the trend is Germany. It is looking to equate the rights of part time workers and full time ones. Similar ideas are debated in Britain. In France and most countries in Central and Eastern Europe, to dismiss a worker, the employer has to show that it has restricted hiring, applied workforce attrition, and reduced overall overtime. The EU's "social chapters" - now on of every member's law books - provides sacked employees with recourse to domestic and European courts against their employers. In other parts of the world, the two parties are subject to conciliation, mediation, or arbitration.

IIId. Reforming the Minimum Wage

Minimum wage hinders the formation of new workplaces - and yet almost all countries have it. Both the USA and the UK have just increased it. Many are considering a scaled minimum wage, age-related, means tested, and skills-dependent.

IIIe. Administrative Measures: Early Retirement

A favorite of post-communist countries in transition, early retirement was liberally applied in order to get rid of "technologically-redundant" workers and thus trim under-employment.

Romania, for instance, offered its workers a handsome up-front payment combined with unemployment benefits. A special Early Retirement Fund was created by setting aside receipts from the privatization of state assets and from dividends received by the state from its various shareholdings.

IIIf. Administrative Measures: Reduction of Working Hours

France has recently implemented the second phase of its transition to a 35 hours working week, making it obligatory for medium and small businesses. It is considered by many economist to be a wasteful measure, based on the "lump of labour" fallacy.

IIIg. Administrative Measures: Public Works

The Civilian Conservation Corps (CCC) was established in the USA in 1932. It offered work for young and unmarried men. They planted trees, erected flood barriers, put out forest fires, and constructed forest roads and trails. They lived in semi-military work camps, were provided with food rations and a modest monthly cash allowance, medical care, and other necessities.

At its apex, the CCC employed 500,000 people - and 3 million people throughout its existence. It was part of a major "public works" drive known as "The New Deal". This Keynesian tradition continues in many countries - from deflationary Japan to racially imbalanced South Africa - to this very day. Such workers are usually paid a salary equal to their unemployment benefits (Workfare).

The Encyclopedia Britannica has this to say about public works:

"The weakness in the proposal to use disguised unemployment for the construction of social overhead capital projects arises from inadequate consideration of the problem of providing necessary subsistence funds to maintain the workers during the long waiting period before the projects yield consumable output. This can be managed somehow for small-scale local community projects when workers are maintained in situ by their relatives - but not when workers move away. The only way to raise subsistence funds is to encourage voluntary savings and expansion of marketable surplus of food purchased with these savings."

Public works financed by grants or soft loans do serve as an interim "unemployment sink" - a countercyclical buffer against wild upswings in unemployment - but, for all we know, they may simply be displacing existing employment at great cost to the public purse.

IIIh. Administrative Measures: Public Education and Dissemination of Information

Employment Bureaus throughout the world - spurred on by stiff competition from the private sector - have transformed themselves from mere registries to active (and computerized) labour exchanges. Many also strive to educate workers, retrain them, and enhance their employability through the acquisition of new skills. The unemployed are taught how to prepare a professional bio, a business plan, a marketing plan, feasibility studies, credit applications and interview skills.

Employment Bureaus now organize job clubs, labour exchanges and employment fairs.

IIIi. National Employment Contract

Many countries - especially in Latin America and in Central and Eastern Europe - have signed "National Employment Contracts" between government, trade unions, employers (represented by the Chamber of Commerce), and Central Bank.

In this neo-corporatist approach, employers usually guarantee the formation of new work places against a freeze on employee compensation, the exclusion of part time labour from collective bargaining, and added flexibility on minimum wages, job security, hiring and firing procedures, social and unemployment benefits, indexation of wages and benefits, the right to strike, and wage increases (increasingly linked to productivity gains).

Trade unions, in return, are granted effective control of the shop floor - issues like unemployment insurance, employment protection, early retirement, working hours, old age pensions, health insurance, housing, taxation, public sector employment, vocational training, and regional aid and subsidies to declining and infant industries.

In Sweden and Germany there is co-determination. Workers are represented even in non-wage related matters (such as the work organization).

Wages and unemployment benefits are perceived as complementary economic stabilizers. Many countries instituted an "Incomes Policy" intended to ensure that employers, pressurized by unions, do not raise wages and prices. In Sweden, for instance, both labour and management organizations are responsible to maintain price stability. The government can intervene in the negotiations and even threaten a wage freeze, or wage AND price controls. In Holland the courts can set wages.

Another possibility is a Guaranteed Wage Plan - Employers assure minimum annual employment or minimum annual wages or both to tenured employees. In return, firms and trade unions forego seniority (LIFO, last in first out, firing the newly hired first) and the employer is given a free hand in hiring and firing employees, regardless of tenure.

IIIj. Labour Disputes Settlement

Most modern collective agreements require compulsory dispute settlement through mediation and arbitration with clear grievance procedures. Possibilities include conciliation (a third party brings management and labour together to try and solve the problems by themselves), mediation (a third party makes nonbinding suggestions to the parties), arbitration (a third party makes final, binding decisions), or Peer Review Panels - where management and labour rule together on grievances.

IIIk. Non-conventional Modes of Work

Work is no longer the straightforward affair it used to be.

In Denmark, a worker can take a special leave. He receives 80% of the maximum unemployment benefits as well as uninterrupted continuity in his social security rights. But he has to use the time for job training, a sabbatical, further education, a parental leave, to take old people (old parents or other relatives), or the terminally ill. This is also the case in Belgium (though only for up to 2 months). These activities are thought of as substitutes for social outlays.

In Britain, part time and full time workers are entitled to the same benefits if wrongfully dismissed and in Holland, the pension funds grant pensions to part time workers. In many countries, night, shift and weekend workers are granted special treatment by law and by collective contract (for instance, exemption from social benefits contributions).

Most OECD countries now encourage (or tolerate) part-time, flextime, from home, seasonal, casual, and job sharing work. Two people sharing the same job as well as shift workers are allowed to choose to be treated, for tax purposes and for the purposes of unemployment benefits, either as one person or as two persons. In Bulgaria, Macedonia, and a host of other post-communist countries, a national part time employment program (called in Macedonia the "Mladinska Zadruga") encourages employers to hire the unemployed on a short term, part time basis.

IIIl. Full Employment Budgets

The national accounts of many countries now produce a full employment budget. It adjusts the budget deficit or surplus in relation to effects of deviations from full or normal unemployment. Thus, a simple balanced budget could be actually contractionary. A simple deficit may, actually, be a surplus on a full employment basis and government policies can be contractionary despite positive borrowing.

IIIm. Apprenticeship, Training, Retraining and Re-Qualification

In France, Germany, the UK, the USA, and many other countries, sub-minimum wages are paid to participants in apprenticeship and training programs. Most of the unemployed can be retrained, regardless of age and level of education. This surprising result has emerged from many studies.

The massive retraining and re-qualification programs required by the technological upheavals of the last few decades are often undertaken in collaboration with the private sector. The government trains, re-trains, or re-qualifies the unemployed - and firms in the private sector undertake to employ them for a minimal period of time afterwards. It is a partnership, with the government acting as educational sub-contractor for the business sector (with emphasis on the needs of small to medium enterprises) and a catalyst of skill acquisition. Such programs include vocational training, entrepreneurship skills, management skills, and even basic literacy and numeracy. Students are often employed as instructors in return for college credits and scholarships.

IIIn. Entrepreneurship and Small Businesses

Small businesses are the engine of growth and job creation in all modern economies. Even the governments of rich countries encourage innovative credit schemes (such as micro-credits) and facilities (such as business incubators), tax credits, and preference to small businesses in government procurement.

Unification, German

The May 22, 2005 elections in North Rhine-Westphalia (with 18 million inhabitants, Germany's most populous state) are expected to determine the fate of Chancellor Gerhard Schroeder, his party, the Social Democrats, SPD (which ruled the state in the last four decades), and his coalition with the Greens. The SPD-Greens are projected to lose to the uninspiring coalition of Christian Democrats (CDU) and Free Democrats. The state is buffeted by the crumbling of traditional industries such as mining and heavy industry

The run up to this election is reminiscent of another - the pivotal elections in Saxony-Anhalt in April 21, 2002. Germany is again in bad shape: high unemployment (12% and rising), exploding public debt, rising crime, collapsing healthcare and education systems.

The vote in the east German Land of Saxony-Anhalt (3 million inhabitants, 8000 sq. miles) was followed with bated breath by assorted South Koreans. The merger of West and East Germany in the wake of the implosion of communism in 1990 is considered to be a test case. Can two political entities separated by ideology, economic doctrine and performance, wealth, political structure, mentality, and history - become one successfully?

The answer was a resounding no only 4 years before. An openly xenophobic right wing party, financed by an eccentric Munich-based publisher-millionaire, garnered 13 percent of the votes in the 1998 bellwether elections in Saxony-Anhalt. These usually precede nationwide parliamentary elections to the Bundestag by 5 months.

Saxony-Anhalt used to be second in industrial production only to the Ruhr. Its chemical factories (120,000 workers) and engineering firms (80,000 employees) were among the most advanced in the world. It still notes with pride that the first color film ever was shot and developed in Wolfen. East Germany, the ostensible industrial powerhouse of the Soviet Bloc, placed Saxony-Anhalt on a pedestal.

Yet, by 1998, one of every four working adults was unemployed. Another 100,000 participated in make-believe and stopgap retraining schemes and public works. A decisive majority of Saxony-Anhalt's young never experienced a day's work. Its bloated, inefficient, and technologically retarded industries crumbled as they faced the powerhouses of West Germany.

Klaus Schucht, Saxony-Anhalt's then minister of economics since 1994 - a former Treuhand privatization expert and Chairman of Ruhrkohle AG (coal industry) - supervised the agonized disintegration of its smokestacks. Salaries in the public sector (e.g., teachers) were cut by up to 20 percent in return for job security. Welfare rolls swelled, 15,000 people became homeless by 1996, unemployment reached monstrous proportions (28 percent) in company towns like Bittersfeld. Yet dwindling tax receipts forced the government to implement four consecutive austerity plans, each harsher than its predecessor.

Inevitably, the voters trounced the nationally-ruling CDU. With 22 percent of the votes, they came almost equal with the PDS - the former (and reformed) vicious communists. The minority SPD-Greens government of Saxony-Anhalt (with tacit PDS support) was unaffected, though people rated its performance 0.2 on a scale of -5 to +5. Only the racist DVU benefited, as it linked mass unemployment to the ubiquity of foreigners, the self-enrichment of an old-new elite of turncoats, and an all-pervasive social crisis. The "Magdeburg Model" of compassionate reform the eastern way - failed.

The "World Socialist Web Site" quoted the DVU's campaign slogans with terrified fascination:

"German money for German jobs", "Jobs for Germans first", "This time - make your vote a protest", "Corrupt politicians, greedy parliamentarians, European Union bigwigs, asylum fraudsters", "If the bosses won't invest, then the state must fund new jobs." The DVU denounced Kohl for being "the main culprit" for the "collapse of our economy."

Not everything was bleak, though. In an article published in November 1999 ("Coming Together, Ten Years on"), "The Economist" described a prospering Hanseatic town in Saxony-Anhalt. It attributed the relative prosperity of the Ossies to Wessies returning to reclaim their property, or to invest, "tempted by cheap labour, a chance to ignore red tape, and fat government incentives to invest in the former east".

Wessies and Ossies still clash in mutual suspicion and envy, the mental barriers are still there, alienation and estrangement as well as crime are rampant, pensions and salaries are lower, unemployment is (much) higher, and the "blossoming landscape" promised by the CDU has shriveled - but the railway to Berlin was being re-opened and the town is full of shopping malls and glittering banks, observed "The Economist".

Yet, this is true only in the "interface" zone between east and west. Further inland, the picture is grim indeed. And, in Saxony-Anhalt, it is the grimmest. At the time of the elections, unemployment was still a devastating 21 percent (January 2002 figures), double the national average and more than in any other eastern Land. Its GDP grew by 0.6 percent in 2000, underperforming national growth (though both the manufacturing and services sectors outperformed the German average). The construction industry contracted by 10 percent in the 12 months to April 2001.

Chancellor Gerhard Schroeder has spent a good part of January 2002 cajoling Bombardier, the Canadian rail equipment maker, not to end production at its Halle factory (900 workers). The German government agreed, in return, to buy from Bombardier several undeveloped land tracts. It is rumored that Bombardier was also promised lucrative state contracts immediately after the September elections.

The almighty trade union IG Metal has pressured BMW into investing 1 billion euros in a new car plant in Leipzig (with supplies coming from Saxony-Anhalt). BMW complied but made it clear that it expects the state of Saxony-Anhalt to underwrite a third of its investment.

Of 11 billion euros slated for capital expenditures in Saxony-Anhalt's decrepit infrastructure - more than 7 billion are transfers from the federal government and the European Union. Saxony-Anhalt, at 25 percent, has double the rate of investment in the Lander of West Germany (though its investment rate declined to 20% by 2004). Only 60 percent  of its 8 billion euros strong budget relies on tax revenues - the rest comes from transfers. Transfers - mainly social benefits - constitute almost half the state's operating expenditures.

Even so, Saxony-Anhalt ran a debilitating budget deficit (9 percent), mostly financed with 3 billion euros of fresh borrowing per year. It renowned for its lavish road shows, trying to market its bonds to international investors. It expects to have zero net borrowing in 2006 - but the mountain of total outstanding debt (76% of which is negotiable) will weigh on this impoverished state for a long time to come. Moreover, it has a reputation in financial markets as being dangerously exposed to credit derivatives in a desperate attempt to reduce its effective interest rate to 5%.

The federal government has rejected calls by the Lander to guarantee their bonds by intermingling state and federal obligations in auctioned "packages". A conceptually similar mixed package of 1.75 billion euros in three year notes issued by seven states ("Lander jumbo") - the 12th of its kind - was sold in January 2002 at a mere 0.22% above the federal benchmark. The Lander owe 350 billion euros between them. Even a marginal improvement in interest rate translates to hundreds of millions of euros in annual savings. Saxony-Anhalt (rated the lowest among the Lander, at AA-) spearheads this campaign.

In an interview to Bloomberg, its finance minister, Heinrich Aller, said:

" 'Different credit ratings for the states and the federal government make no sense' ... He said there is no risk to the government in guaranteeing the states as they are 'too big' and 'too public' to default on payments. Eichel (the German minister of finance) is concerned that centralized bond sales could cause the government's borrowing costs to rise ... The government is reluctant to act as guarantor for states on interest and debt repayments (said Deputy Finance Minister of Germany Karl Diller)."

But many are betting that, in an effort to impose fiscal discipline on the oft-errant Lander, the federal government may yet agree to joint issuance of bonds subject to clear limitations on regional budget deficits (a "national stability pact"). Should this happen, Germany's rating is likely be downgraded but Saxony-Anhalt would stand to benefit, its borrowing and debt service costs cut considerably by its enhanced credit rating.

This could be one of the goodies the SPD has in store for the eastern states, under the umbrella of its "Towards the Future" economic program. Schroeder unrealistically promises to equalize wage levels between east and west by 2007. Investors in the eastern parts will be entitled to even more generous incentives. Job creation schemes (worth 10 billion euros annually) will abound.

On a Sunday in mid-March 2002, the SPD held a special (and unprecedented) conclave of SPD associations in the eastern states in Magdeburg. It is a measure of desperation. Despite some recent anti-eastern steps by the CDU and CSU (e.g., contesting cross-subsidies in Germany's health insurance funds which benefit the Ossies) - discontent with the SPD and its lackluster performance was rife. The CDU succeeded to shift the emphasis from unilateral transfers to the east (a whopping trillion euros since 1990) to the formation of new businesses, the promotion of R&D in universities, and the enhancement of business-critical infrastructure.

The SPD never really swept Saxony-Anhalt off its feet. Hoppner, the prime minister at the time, headed a minority government, the outcome of narrowly averted defeats in both 1994 and 1998. He did his populist best to reflect east German disenchantment and longing for a spurious past of tight-knit communities and low crime rates. But in doing so he played into the hands of the PDS whose rise is now inevitable. It has been the SPD's silent partner all along and thus legitimized and rehabilitated. Its comeback is part of a trend all over Central and Eastern Europe. But apart from the PDS, it would be wrong to read too much into the state elections in April as far as the future alignment of national politics is concerned.

Perhaps more importantly, the elections in Saxony-Anhalt were a referendum about the unification of Germany. Has it really been a failure, good intentions and a trillion euros notwithstanding? Is future Germany an entity permanently fractured along the old fault lines of rich vs. poor and east vs. west? Does the solution consist of throwing more money at the problem or is a fundamental re-think called for? Above all, will it ever get better? The unemployed, welfare-dependent, and humiliated denizens of Saxony-Anhalt don't believe so. They feel second class and East Germany is retroactively idealized in a perverted form of nostalgia.  Germany - and the world with it - have been losing its faith as well. The experiment may have failed after all. South Korea is again watching closely. 

Unification, German and Korean

In July-August 2002, the north and south rumps of an erstwhile unified Korea have agreed to reconvene, at North Korea's rare request, cabinet-level talks severed the year before. Only 6 weeks before that, on June 29, 2002 vessels of these two countries clashed to lethal effect in the Yellow Sea - an incident for which the North now, startlingly, expressed its regrets.

The South's indefatigable unification ministry concluded the three-days negotiations on August 14, a day before both polities celebrate the end of the brutal Japanese occupation. North Korea also consented to participate in the 14th Asian Games, held in September 2002 in Busan in South Korea. It even partook in a friendly football match with the South.

Noble prizewinner South Korean president at the time, Kim Dae Jung launched his "sunshine policy" - a Korean Ostpolitik - towards the famished and decrepit North in June 2000, when he met the "Dear Leader", Kim Jon Il. This led to precious little hitherto. A few members of families divided by the war in 1950-3 were finally allowed to briefly reunite. North Korea gorged on South Korean and Japanese grain and extorted cash from visitors to the much adored Mount Geumgang.

UPI was among the first to report a discernible shift to market principles in the North. This was coupled with thawing relations with the West, notably the United States. Both the Japanese foreign minister and America's secretary of state conversed with their North Korean counterpart during the ASEAN regional forum in Brunei in early August 2002. The North even requested talks with the US-led United Command it so decries.

These breakthroughs were followed by frequently interrupted rounds of negotiations between the United States and North Korea, in the presence of 4 observer nations (among them Russia and China). North Korea admitted, in the process, to owning nuclear weapons and extorted additional economic benefits from its southern neighbor. The United States demands unilateral and unconditional nuclear disarmament and accuses the North Korean "tyranny" of illegal proliferation of nuclear materiel and technology.

But, otherwise, the North remains as recalcitrant and belligerent as ever. The prospects of Korean unification are best gauged in Panmunjom, scene of the armistice that ended the Korean war, where a South Korean rail line ends abruptly. The North has yet to construct the few miles to Kaesong within its territory. North Korea's Committee for the Peaceful Reunification of the Fatherland continues its vitriolic diatribes against South and West alike.

Unification is not a straightforward matter not only geopolitically or politically - but also, and, perhaps, mainly, economically.

In a Northeast Asia Peace and Security Network Special Report dated August 1999 and titled "Modeling Korean Unification", the authors, among them Marcus Noland, a leading authority on the subject, recommended a customs union between the two Koreas as a way to ameliorate northern famine and generate a peace dividend through military demobilization.

The authors believe that unification will affect South Korea's "composition of output, the distribution of income, and the rate of economic growth". Should capital flow in from the rest of the world, the won is likely to appreciate and the "nontraded goods sectors could expand at the expense of the traded goods sectors".

It would take at least a decade for northern incomes to reach 55 percent of southern ones.

"The amount of capital investment necessary to raise Northern per capita incomes to 60 percent those of the South would actually drive the rate of return on capital in the North below that in the South. However, it would be possible to attain the 60 percent target without such equalization of the rate of return in the two parts of Korea under high-end estimates of the speed of technological convergence. This suggests that either the rate of technological convergence would have to be very rapid (say, 12 percent annually), or restriction on migration from the North to the South would have to be imposed on a semi-permanent basis."

South Korea itself is likely to be as transformed by unification as the north. Cheap migrant labour from the across the erstwhile border will tilt the balance between income from capital and income from labor in favor of the former. As northerners occupy low-skill jobs, southerners are bound to monopolize the high end of the labor market. Income inequality will widen.

Noland believes that the cost of unification can be limited. It is hard to see how, though. Inter-Korean trade leapt 21 percent year-over-year to a meager $130 million in the first four months of 2002 - including $51 million in "non-trade" items, such a food grants.

The North maintained a trade surplus of $51 million with the South in these 120 days, excluding humanitarian assistance and Southern gifts. It exported to the South agricultural products, fish, and textiles and imported from it machinery, chemicals, and processed textiles. A mere 62 companies - of a total of 188 - worked on a "processing-on-commission" basis, elsewhere a very common practice in least developed countries.

The World Bank sounds more realistic when it pegs the overall cost at 5-6 times South Korea's GDP, or $2-3 trillion. Noland notes that between $300-600 billion over ten years would be needed to raise North Korean income levels to 60 percent of the Southern average and to prevent ruinous mass migration from North to South. Young-sun Lee, another scholar, concurs with the high end of Noland's estimate.

The historical irony is that the North, until 1950, has been the industrial powerhouse of the united Korea. Mining, heavy industry, and science were all concentrated in the north. The south was home to agriculture and light, family-owned, industry. Despite American carpet bombing which pulverized its manufacturing base, the North grew faster than the south throughout the 1950's and 1960's - albeit partly thanks to Chinese and Russian monetary infusions.

But while the south - with double the north's population - leapt from an average GDP per capita of $90 in the mid-60's to almost $9000 in 1999 - the north crept to one tenth, some say one twentieth, this figure in 2001. And while North Korea's foreign trade is a measly $2 billion - the South trades almost $300 billion in goods and services. After China and Japan, South Korea is the North's largest trading partner.

The harrowing stories of fatal famine in the North are a commonplace by now. Even by its official - and, thus, false - figures, the North admits to a quarter of a million deaths by starvation. The figure may be 10 times as high. Energy shortages mean that factories are working at 10-15 percent capacity, reported "The Economist" in August 2002.

Though far more suave, the South may be pursuing a passive-aggressive tack of its own. Unification is likely to be a better avoided prohibitively expensive and economically destabilizing affair. An apt parallel would be with Yemen, whose Marxist and destitute south united with the far more prosperous and open north only to yield a devastating civil war two years later. But the Koreans optimistically prefer to compare their situation to pre-unification Germany.

A decade and $1 trillion in subsidies later, not counting $2.6 billion in annual handouts from the European Union - east Germany is still woefully trailing its west. According to figures published by The Frankfurter Allgemeine Zeitung, the growth rate and productivity of the east - the German mezzogiorno - is a mere 70 percent of the western Lander. The east contributes one tenth of German GDP with one fifth of the population. A quarter of a million jobs have evaporated between 1998 and 2002 alone.

Unemployment, at 17.8 percent in June, 2002 is the highest since 1990. The tax base is shrinking as the dreary region is drained of its populace. Three years ago, Germany has extended federal aid to the east - financed by a much-resented 5 percent surtax - by another 20 years.

This massive failure is a hot topic in every election campaign in Germany. BMW has been courted, cajoled, and bribed with copious tax breaks to open a new factory in Leipzig. Volkswagen's decision to launch a positively minor plant in Dresden was hailed as a breakthrough.

On a visit to Seoul in 2002, German Nobel laureate Gunter Grass cautiously suggested that unification may follow a long period of engagement. He hoped, he said, that Korea will not repeat the mistakes that his country committed - the exorbitant taxes and the human dislocation. He bemoaned the lack of cultural and artistic exchanges between the Koreas.

But Korean unification may pose more than belletristic predicaments.

Another German, Otto Graf Lambsdorff, compared the Korean experience to the German one in a guest column in the "Korea Herald":

"The (economic) conditions in Korea ... (are) more difficult than those in Germany around the time of its reunification ... In relation to the West German population, the East German population was much smaller than the respective proportions of North to South Koreans ... The discrepancy regarding the level of economic development is much larger between South and North Korea than it was between West and East Germany ... It is sometimes overlooked that in the case of East Germany about one-third of the economic production was delivered by a private and cooperative sector ... Furthermore, in contrast to the ... isolation (of North Korea), (East Germany) participated actively and with a certain degree of success in international economic exchanges."

He noted that it took Germany 20 years to unite after the first east-west summit in 1970. But the parallels end there. By being absorbed in West Germany, the east gained immediate access to the European Union. There is no Asian equivalent of a common market. Moreover, the North Korean market is geared to support a bloated military and to produce weapons, especially missiles. Demobilization may prove to be a thorny issue economically as well as politically.

In Korea's case the very term "unification" may be misleading. According to a "Korea Times" commentary by Dr. Park Eung-kyuk of Hanyang University, the South aims at an EU-like confederation while the North counters with a loose federation.

Is there anything these two disparate polities can learn from the German experience?

The first serious effort to answer this question was made in 1993 by an expert group chaired by former German chancellor, Helmut Schmidt. Its conclusions and policy recommendations reverberate through subsequent scholarship and commentary. In July 2002, the Frankfurter Allgemeine Zeitung, neatly summed up the error-ridden unification process thus:

"At unification, many western companies viewed the East as a new export market, a consumer land. Instead of investing in production sites there, they funneled goods and services to a consumption-starved public armed with a cash windfall from the currency exchange."

The Kohl-mandated exchange rate of 1 ostmark to 1 deutschmark rather than the previous and more realistic rate of 4:1 had grave repercussions. To avoid inflation, the Bundesbank was forced to raise interest rates and induce a recession.

The paper continues:

"Eastern goods were priced out of the market as manufacturing cost quadrupled overnight. The country's chief export market, the former Soviet bloc, also went bankrupt. Local consumers bought western goods. No revenue flowed back to the East, touching off a mass exodus of labor that reduced the workforce by one-third in three years."

In a book titled "Avoiding the Apocalypse" and published in 2001 by the Institute for International Economics, Marcus Noland disputes this scenario. The culprit was wage policy, not the exchange rate. On the contrary, the transfer of wealth to the east through the exchange rate mechanism eased its problem of lack of competitiveness and did not result in inflation. He even goes as far as floating an idea of dollarizing inter-Korean trade.

Driving east German wages beyond productivity - in response to labor union pressure - depressed output and may have encouraged westward migration. The sluggish rate of privatization served to perpetuate mismanagement. The practice of property restitution impeded the assignment of clear property rights and, as a result, hampered investment. Privatization was further hobbled by the refusal to write off enterprise debt outright.

The Schmidt commission strongly differs:

"In transferring to a market economy, it is not possible to leave everything to market forces. The deficiencies of the infrastructure in the former GDR were grossly underestimated as was the environmental contamination, the lack of modern technology. The political, legal, economic, educational, and social security systems changed, including traffic rules. It is an enormous achievement for the East German population to have coped with the stress created by this veritable revolution. But it also created distrust, lack of initiative, confusion, and fear all of which should have been more effectively addressed."

The recipe which seems to enjoy a consensus among scholars and politicians alike calls for a gradual unification. Trading and investments should be followed by a currency union at a realistic exchange rate, land reform in the North, and the institution and restitution of property rights. Tourism and services establishments should be privatized first, agriculture later.

The state would have to design and implement a series of industrial policies to prevent market failures and provide public goods. Its top priorities should be infrastructure and institution building. Human capital must be augmented by the transfer of qualified personnel from the south while northerners are trained or retrained. It may be necessary to restrict immigration during a transition period.

Help and support from the international community - Korea's neighbours, the Asian Development Bank, the IMF, the World Bank, the West - would be indispensable. It is here that unification may blunder.

Many Asian countries - not least, China - may be unhappy with the idea of a united, independent, and economically prosperous Korea under Western influence. Lending to emerging economies - not to mention unification projects - has dried up and is likely to remain so for years to come. The West has its own agenda regarding the "axis of evil". Ultimately, Koreans trying to unite may be faced with an insurmountable common adversary - geopolitics.

United Nations

In March 2005, an increasingly isolationist United States appointed an outspoken critic of the United Nations, John Bolton, to serve as its Ambassador there.

Less than two years earlier, Arab nations tabled a resolution at the United Nations General Assembly condemning the U.S.-British led "invasion" and "occupation" of Iraq and calling for immediate troop withdrawal. A similar effort at the Security Council failed, doomed by the veto powers of both alleged aggressors.

This did endear the organization to the Bush administration whose hawks regard it as a superfluous leftover from the Cold War era. Rep. Ron Paul (R-Texas) even introduced legislation to withdraw from the organization altogether. Nile Gardiner, a visiting fellow at the Heritage Foundation, summed up these sentiments in Insight Magazine thus:

"I think the U.N. has been in gradual decline for many years. It failed to act spectacularly in Rwanda and did nothing about Slobodan Milosevic's brutal regime. Iraq is the latest in a long line of failures."

Admittedly, like any bureaucracy, the organization is self-perpetuating, self-serving and self-absorbed. But it - and its raft of specialized offshoots - still give back far more than they receive. In recognition of the U.N.'s crucial role, several liberal Democrats have entered legislation to create a "permanent U.N. security force" and to "voluntarily contribute" to the U.N. Population Fund.

Consider peacekeeping operations. At a total annual cost of c. $5 billion in 2002, U.N. peacekeeping missions employ close to 40,000 police and military and another 11,000 civilians from 89 countries. The budget is shoestring and more than half the pledged contributions are still outstanding. The U.N. consumes less than 0.001 percent of the world's gross domestic product. As James Paul, Executive Director of Global Policy Forum, observes:

"All UN staff, including the specialized agencies and funds, are fewer than the civil service of the City of Stockholm or the staff of McDonalds. The core UN budget is one half of one percent of the US military budget and far less than the cost of one B-2 bomber aircraft."

Even the United States Mission to the United Nations, on its Web site, seeks to debunk a few myths. Despite a massive increase in remit and operations, the organization's budget, at $2.6 billion, has remained constant since 1995. The workforce was cut by 11 percent, to 9000 employees, since 1997:

"The UN has done a great deal to increase efficiency and overall accountability. In 1994, the UN created the Office of Internal Oversight Services (OIOS) to serve as the inspector general and promote efficient management and reduce waste, fraud and abuse. During the year ended June 30, 2001, OIOS recommended $58 million in savings and recoveries for the UN and persuaded UN program managers to implement hundreds of recommendations for improving management and internal controls. OIOS investigations also led to successful convictions of UN staff and others for fraud and stealing UN funds."

Yet, bad - and expensive - habits die hard. Budget discipline is lax with no clear order of priorities. The United Nations suffers from an abundance of obsolete relics of past programs, inertly and futilely maintained by beneficiary bureaucrats. Follow-up U.N. conferences - and they tend to proliferate incontrollably - are still being held in exotic resorts, or shopping-friendly megalopolises. United Nations entities at the country level duplicate efforts and studiously avoid joint programming, common databases and pooling of resources.

The aforementioned OIOS has hitherto identified more than $200 million in waste and fraud and issued 5000 recommendations to improve efficiency, transparency and accountability. Disgusted by the flagrant squandering of scarce resources, the United States - which covers one fifth of the august establishment's pecuniary needs - accumulated more than $1.2 billion in arrears by 1999, double the debts of all other members combined.

It has since repaid the bulk of these even as it reduced its share of the United Nations' finances. It now contributes 22 percent of the regular budget, down from 25 percent and 25-27 percent of the costs of the U.N. peacekeeping forces, down from 30-31 percent.

But a row erupted in the corridors of power with regards to the proposed budget for 2004-5. Ambassador Patrick Kennedy, United States Representative for United Nations Management and Reform, called it "a step backwards". The European Union, predictably, "fully concurred" with it and urged members to increase the budget in line with the U.N.'s enhanced responsibilities.

Kofi Annan, the U.N. General Secretary since 1997, is promoting the nation-building and humanitarian credentials of his reformed outfit for the postwar reconstruction of Iraq. American President George Bush is less than keen and Prime Minister Tony Blair of Britain has moderated his pro-multilateralist rhetoric following his meetings with Bush.

Even erstwhile keen supporters of the United Nations, such as Japan, a surprising member of the "coalition of the willing", are hesitant. Japan contributes close to one fifth of the international body's regular budget. Yet, disillusioned by its inability to gain permanent membership of the Security Council despite its economic clout, Japan announced, in January 2003, its intention to cut its participation by 5 percent.

The United States seems to wish to consign the organization to the humanitarian aspects of Iraq's restoration. As early as April 2003, the U.S. Agency for International Development (USAID) granted $8 million to the U.N.'s Children's Fund (UNICEF) to pay for sanitation, healthcare and potable water schemes in Iraq as well as for micronutrients, vitamins and medicines for its malnourished and disease-stricken populace.

Succumbing to its niche typecasting, the United Nations has launched an unprecedented $2.2 billion "emergency appeal for immediate humanitarian assistance for the people of Iraq over the next six months, with $1.3 billion devoted to a massive food aid operation ... to help the displaced, refugees, children, the elderly and other especially vulnerable groups". The donor funds will augment the proceeds of the revamped (and effectively terminated) oil-for-food program, now entirely under the control of the General Secretary.

So, is the United Nations really "just a farce" and its members mostly "petty despots" as Conrad Black, the Canadian erstwhile media mogul, has it in his interviews? Or, paradoxically, has this international body been strengthened by its faithful depiction of resistant world opinion in the face of perceived Anglo-Saxon bullying? The global assembly's future largely depends on an incensed and disenchanted United States.

Unable to rely on the kindness of strangers, Annan is reaching out to new constituencies.

At the 1999 World Economic Forum in Davos, he challenged the global business community to enter a "Global Compact" with the U.N. to uphold "human rights, labour standards and environmental practices." The International Chamber of Commerce, representing 7,000 business organizations in 137 countries, picked up the gauntlet and published a joint statement at a July 1999 meeting with United Nations bigwigs.

This uneasy partnership drew severe criticisms from non-governmental organizations the world over. Corpwatch, a California-based NGO, observed acidly that "in the first 18 months of the Global Compact, we have seen a growing but secret membership, heavy influence by the International Chamber of Commerce, and a failure to publish even a single case study of sustainable practices. The Global Compact logo has been used without attribution by DaimlerChrysler, even as Global Compact officials insist that use of the general UN logo is strictly controlled. The Global Compact represents a smuggling of a business agenda into the United Nations. It should not be considered a contribution to or framework for the Johannesburg Summit."

The United Nations - like NATO and other Cold War critters - is an organization in search of a purpose. The demise of the USSR constituted a tectonic shift in international affairs. The U.N.'s inability to accommodate its institutions to the supremacy of the United States, the demography of China, the decline of Britain and France and the economic clout of Germany, India, Brazil, and Japan are symptoms of denial and delusion that are detrimental to the future of this otherwise benign and useful establishment. The war in Iraq is merely a rude wake-up call. And about time, too.

United States-China Relations

European intellectuals yearned for the mutually exclusive: an America contained and a regime-changed Iraq. The Chinese are more pragmatic - though, bound by what is left of their Marxism, they still ascribe American behavior to the irreconcilable contradictions inherent in capitalism.

The United States is impelled by its economy and values to world dominion, claimed in March 2003 an analysis titled "American Empire Steps Up Fourth Expansion" in the communist party's mouthpiece People's Daily. Expansionism is an "eternal theme" in American history and a "main line" running through its foreign policy.

The contemporary USA is actually a land-based empire, comprising the territorial fruits of previous armed conflicts with its neighbors and foes, often one and the same. The global spread of American influence through its culture, political alliances, science and multinationals is merely an extrapolation of a trend two centuries in the making.

How did a small country succeed to thus transform itself?

The paper attributes America's success to its political stability, neglecting to mention its pluralism and multi-party system, the sources of said endurance. But then, in an interesting departure from the official party line, it praises US "scientific and technological innovations and new achievements in economic development". Somewhat tautologically, it also credits America's status as an empire to its "external expansions".

The rest of the article is, alas, no better reasoned, nor better informed. American pilgrims were forced westward because "they found there was neither tile over their heads nor a speck of land under their feet (in the East Coast)". But it is the emphases that are of interest, not the shoddy workmanship.

The article clearly identifies America's (capitalistic) economy and its (liberal, pluralistic, religious and democratic) values as its competitive mainstays and founts of strength. "US unique commercial expansion spirit (combined with the) the puritan's 'concept of mission' (are its fortes)", gushes the anonymous author.

The paper distinguishes four phases of distension: "First, continental expansion stage; second, overseas expansion stage; third, the stage of global contention for hegemony; and fourth, the stage of world domination." The second, third and fourth are mainly economic, cultural and military.

In an echo of defunct Soviet and Euro-left conspiracy theories, the paper insists that expansion was "triggered by commercial capital". This capital - better known in the West as the military-industrial complex - also determines US foreign policy. Thus, the American Empire is closer to the commercially driven British Empire than to the militarily propelled Roman one.

Actually, the author thinks aloud, isn't America's reign merely the successor of Britain's? Wasn't it John Locke, a British philosopher, who said that expansion - a "natural right" - responds to domestic needs? Wasn't it Benjamin Franklin who claimed that the United States must "constantly acquire new land to open up living space" (the forerunner of the infamous German "Lebensraum")?

The author quotes James Jerome Hill, the American railway magnet, as exclaiming, during the US-Spanish War, that "If you review the commercial history, you will discover anyone who controls oriental trade will get hold of global wealth". Thus, US expansion was concerned mainly with "protecting American commercial monopoly or advantageous position". America entered the first world war only when "its free trade position was challenged", opines the red-top.

American moral values are designed to "serve commercial capital". This blending of the spiritual with the pecuniary is very disorienting. "Even the Americans themselves find it hard to distinguish which matter is expanding national interests under the banner of 'enforcing justice on behalf of Heaven' and which is propagating their ideology and concept of value on the plea of national interests."

The paper mentions the conviction, held by most Americans, that their system and values are the "best things in human society". Moreover, Americans are missionaries with a "manifest destiny" and "the duty and obligation to help other countries and nations" and to serve as the "the beacon lighting up the way for the development of other countries and nations". If all else fails, it feels justified to "force its best things on other countries by the method of Crusades".

This is a patently non-Orthodox, non-Marxist interpretation of history and of the role of the United States - the prime specimen of capitalism - in it. Economy, admits the author, plays only one part in America's ascendance. Tribute must be given to its values as well. This view of the United States - at the height of an international crisis pitting China against it - is nothing if not revolutionary.

American history is re-cast as an inevitable progression of concentric circles. At first, the United States acted as a classic colonial power, vying for real estate first  with Spain in Latin America and later with the Soviet Union all over the world. The Marshall Plan was a ploy to make Europe dependent on US largesse. The Old Continent, sneers the paper, is nothing more than "US little partner".

Now, with the demise of the USSR, bemoans the columnist, the United States exhibits "rising hegemonic airs" and does "whatever it pleased", concurrently twisting economic, cultural and military arms. Inevitably and especially after September 11, calls for an American "new empire" are on the rise. Iraq "was chosen as the first target for this new round of expansion".

But the expansionist drive has become self-defeating: "Only when the United States refrains from taking the road of pursuing global empire, can it avoid terrorists' bombs or other forms of attacks befalling on its own territory", concludes the opinion piece.

What is China up to? Were this - and similar - articles a signal encrypted in the best Cold War tradition?

Another commentary published a few days later may contain the public key. It is titled "The Paradox of American Power". The author quotes at length from "The Paradox of American Power - Why the World's Only Superpower Can't Go It Alone" written by Joseph Nye, the Dean of the John F. Kennedy School of Government at Harvard and a former Assistant Secretary of Defense:

"Hard power works through coercion, using military sticks and economic carrots to get others to do our will. Soft power works through attraction ... Our attractiveness rests on our culture, our political values and our policies by taking into account the interests of others."

As it summarizes Nye's teachings, the tone of the piece is avuncular and conciliatory, not enraged or patronizing:

"In today's world, the United States is no doubt in an advantageous position with its hard power. But ... power politics always invite resentment and the paradox of American power is that the stronger the nation grows, the weaker its influence becomes. As the saying goes, a danger to oneself results from an excess of power and an accumulation of misfortunes stems from lavish of praises and favors. He, whose power grows to such a swelling state that he strikes anybody he wants to and turns a deaf ear to others' advice, will unavoidably put himself in a straitened circumstance someday. When one indulges oneself in wars of aggression under the pretext of 'self security' will possibly get, in return, more factors of insecurity ... Military forces cannot fundamentally solve problems and war benefits no one including the war starter."

Nor are these views the preserve of the arthritic upper echelons of the precariously balanced Chinese Communist party.

In the same month, in an interview he granted to Xinhua, the Chinese news agency, Shen Jiru, chief of the Division of International Strategy of the Institute of World Economics and Politics, Chinese Academy of Social Sciences, reiterated his conviction that "the United States aims to create a unipolar world through the Iraq issue".

Mirroring the People's Daily, he did not think that the looming Iraq war can be entirely explained as a "dispute on oil or economic interests". It was, he thought, about "the future model of international order: a multipolar and democratic one, or the US strategic goal of a unipolar world". China has been encouraged by dissent in the West. It shows that the "multipolar international community" is an "inevitable" momentum of history.

Why this sudden flurry of historiosophic ruminations?

According to Stratfor, the strategic forecasting consultancy, "for Beijing, the only way to stymie the fourth phase is through promoting multilateralism; barring that, China must be prepared to confront the United States in the future, and U.S. history can give some guidance ... Thus, Beijing continues to focus on the concept of multilateralism and the legitimacy of the United Nations as the best ways to slow or even disrupt U.S. expansionism. At the same time, Beijing is preparing to face a future confrontation with the United States if necessary."

When its economy matures, China wants to become another United States. It has started emulating America two decades ago - and never ceased. Recent steps include painful privatization, restructuring of the banking system, clamping down on corruption and bad governance, paring down the central bureaucracy, revamping the military and security apparatus and creating mechanisms for smooth political transitions.

China sent a man to the moon. It invests heavily in basic science and research and development. It is moving gradually up the manufacturing food chain to higher value added industries. It is the quintessential leapfrogger, much of its cadre moving straight from the rustic to the plastic - computers, cellular phones, wireless and the like.

Ironically, it could never have made it even this far without its ostensible foe. Thousands of bright Chinese students train in the United states. American technologies, management, knowledge, capital and marketing permeate Beijing's economic fabric. Bilateral trade is flourishing. China enjoys the biggest share of the world's - in large part American - foreign direct investment flows. Should the United states disintegrate tomorrow - China would assuredly follow.

Valuation (of Stocks)

The debate rages all over Eastern and Central Europe, in countries in transition as well as in Western Europe. It raged in Britain during the 80s.

Is privatization really the robbery in disguise of state assets by a select few, cronies of the political regime? Margaret Thatcher was accused of it - and so were privatizers in developing countries. What price should state-owned companies have fetched? This question is not as simple and straightforward as it sounds.

There is a stock pricing mechanism known as the Stock Exchange. Willing buyers and willing sellers meet there to freely negotiate deals of stock purchases and sales. New information, macro-economic and micro-economic, determines the value of companies.

Greenspan testifies in the Senate, economic figures are released - and the rumour mill starts working: interest rates might go up. The stock market reacts with frenzily - it crashes. Why?

A top executive is asked how profitable will his firm be this quarter. He winks, he grins - this is interpreted by Wall Street to mean that profits will go up. The share price surges: no one wants to sell it, everyone want to buy it. The result: a sharp rise in its price. Why?

Moreover: the share price of a company of an identical size, similar financial ratios (and in the same industry) barely budges. Why not?

We say that the stocks of the two companies have different elasticity (their prices move up and down differently), probably the result of different sensitivities to changes in interest rates and in earnings estimates. But this is just to rename the problem. The question remains: Why do the shares of similar companies react differently?

Economy is a branch of psychology and wherever and whenever humans are involved, answers don't come easy. A few models have been developed and are in wide use but it is difficult to say that any of them has real predictive or even explanatory powers. Some of these models are "technical" in nature: they ignore the fundamentals of the company. Such models assume that all the relevant information is already incorporated in the price of the stock and that changes in expectations, hopes, fears and attitudes will be reflected in the prices immediately. Others are fundamental: these models rely on the company's performance and assets. The former models are applicable mostly to companies whose shares are traded publicly, in stock exchanges. They are not very useful in trying to attach a value to the stock of a private firm. The latter type (fundamental) models can be applied more broadly.

The value of a stock (a bond, a firm, real estate, or any asset) is the sum of the income (cash flow) that a reasonable investor would expect to get in the future, discounted at the appropriate rate. The discounting reflects the fact that money received in the future has lower (discounted) purchasing power than money received now. Moreover, we can invest money received now and get interest on it (which should normally equal the discount). Put differently: the discount reflects the loss in purchasing power of money deferred or the interest lost by not being able to invest the money right away. This is the time value of money.

Another problem is the uncertainty of future payments, or the risk that we will never receive them. The longer the payment period, the higher the risk, of course. A model exists which links time, the value of the stock, the cash flows expected in the future and the discount (interest) rates.

The rate that we use to discount future cash flows is the prevailing interest rate. This is partly true in stable, predictable and certain economies. But the discount rate depends on the inflation rate in the country where the firm is located (or, if a multinational, in all the countries where it operates), on the projected supply of and demand for its shares and on the aforementioned risk of non-payment. In certain places, additional factors must be taken into account (for example: country risk or foreign exchange risks).

The supply of a stock and, to a lesser extent, the demand for it determine its distribution (how many shareowners are there) and, as a result, its liquidity. Liquidity means how freely can one buy and sell it and at which quantities sought or sold do prices become rigid.

Example: if a controlling stake is sold - the buyer normally pays a "control premium". Another example: in thin markets it is easier to manipulate the price of a stock by artificially increasing the demand or decreasing the supply ("cornering" the market).

In a liquid market (no problems to buy and to sell), the discount rate is comprised of two elements: one is the risk-free rate (normally, the interest payable on government bonds), the other being the risk-related rate (the rate which reflects the risk related to the specific stock).

But what is this risk-related rate?

The most widely used model to evaluate specific risks is the Capital Asset Pricing Model (CAPM).

According to it, the discount rate is the risk-free rate plus a coefficient (called beta) multiplied by a risk premium general to all stocks (in the USA it was calculated to be 5.5%). Beta is a measure of the volatility of the return of the stock relative to that of the return of the market. A stock's Beta can be obtained by calculating the coefficient of the regression line between the weekly returns of the stock and those of the stock market during a selected period of time.

Unfortunately, different betas can be calculated by selecting different parameters (for instance, the length of the period on which the calculation is performed). Another problem is that betas change with every new datum. Professionals resort to sensitivity tests which neutralize the changes that betas undergo with time.

Still, with all its shortcomings and disputed assumptions, the CAPM should be used to determine the discount rate. But to use the discount rate we must have future cash flows to discount.

The only relatively certain cash flows are dividends paid to the shareholders. So, Dividend Discount Models (DDM) were developed.

Other models relate to the projected growth of the company (which is supposed to increase the payable dividends and to cause the stock to appreciate in value).

Still, DDM’s require, as input, the ultimate value of the stock and growth models are only suitable for mature firms with a stable, low dividend growth. Two-stage models are more powerful because they combine both emphases, on dividends and on growth. This is because of the life-cycle of firms. At first, they tend to have a high and unstable dividend growth rate (the DDM tackles this adequately). As the firm matures, it is expected to have a lower and stable growth rate, suitable for the treatment of Growth Models.

But how many years of future income (from dividends) should we use in our calculations? If a firm is profitable now, is there any guarantee that it will continue to be so in the next year, or the next decade? If it does continue to be profitable - who can guarantee that its dividend policy will not change and that the same rate of dividends will continue to be distributed?

The number of periods (normally, years) selected for the calculation is called the "price to earnings (P/E) multiple". The multiple denotes by how much we multiply the (after tax) earnings of the firm to obtain its value. It depends on the industry (growth or dying), the country (stable or geopolitically perilous), on the ownership structure (family or public), on the management in place (committed or mobile), on the product (new or old technology) and a myriad of other factors. It is almost impossible to objectively quantify or formulate this process of analysis and decision making. In telecommunications, the range of numbers used for valuing stocks of a private firm is between 7 and 10, for instance. If the company is in the public domain, the number can shoot up to 20 times net earnings.

While some companies pay dividends (some even borrow to do so), others do not. So in stock valuation, dividends are not the only future incomes you would expect to get. Capital gains (profits which are the result of the appreciation in the value of the stock) also count. This is the result of expectations regarding the firm's free cash flow, in particular the free cash flow that goes to the shareholders.

There is no agreement as to what constitutes free cash flow. In general, it is the cash which a firm has after sufficiently investing in its development, research and (predetermined) growth. Cash Flow Statements have become a standard accounting requirement in the 80s (starting with the USA). Because "free" cash flow can be easily extracted from these reports, stock valuation based on free cash flow became increasingly popular and feasible. Cash flow statements are considered independent of the idiosyncratic parameters of different international environments and therefore applicable to multinationals or to national, export-orientated firms.

The free cash flow of a firm that is debt-financed solely by its shareholders belongs solely to them. Free cash flow to equity (FCFE) is:

FCFE = Operating Cash Flow MINUS Cash needed for meeting growth targets

Where:

Operating Cash Flow = Net Income (NI) PLUS Depreciation and Amortization

Cash needed for meeting growth targets = Capital Expenditures + Change in Working Capital

Working Capital = Total Current Assets - Total Current Liabilities

Change in Working Capital = One Year's Working Capital MINUS Previous Year's Working Capital

The complete formula is: