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COURCYINT SPECIAL BULLETIN

To: All Courcy's Intelligence Service members

Date: 7 November 2003

From: Joe de Courcy, Chief Executive, Courcy's Intelligence Service

Subject: AN INSIGHT INTO IRAQI OPPOSITION RECRUITMENT TACTICS

SUMMARY

A report published this week by the London-based Arabaic newspaper al-Hayat provides a disturbing (albeit predictable) insight into how the Iraqi opposition is seeking to exploit youth unemployment in Iraq.  It was filed by the paper's correspondent in Baghdad Ali Abd-al-Amir on 4 November.

ANALYSIS

Back in June, the newly appointed US administrator in Iraq Paul Bremer said that the country's "staggering unemployment rate" may exceed 50% and that finding jobs was his number one task.  He said:  "We're facing an unemployment problem that is certainly without precedent in my life, and that, of course, creates real hardship for the Iraqi men and women out there,"

However, four months on the problem remains severe, partly because of a reluctance by US sub-contractors to employ Iraqis for security reasons.  As Colonel Damon Walsh, head of the Coalition Provisional Authority's procurement office, admits:  "We don't want to overlook Iraqis, but we want to protect ourselves.  From a force protection standpoint, Iraqis are more vulnerable to a bad guy influence."  Backing this up, a recent report London's Financial Times quoted a Pakistani manager in Baghdad for the Tamimi Company, which is based in the Saudi city of Dammam and is contracted to cater for 60,000 soldiers in Iraq, as saying: "Iraqis are a security threat.  We cannot depend on them."  So instead of employing locals, companies are turning to south Asian labour to implement contracts, from prison-building to catering for US troops, and as a consequence recent weeks have seen unemployment-inspired unrest in several major cities, including the capital Baghdad.

It is against this background that al-Hayat's 4 November despatch from Baghdad should be read.  According to al-Hayat's correspondent Ali Abd-al-Amir: "Iraqi youths suffering from unemployment, which is affecting half the working force of the country, can now find a drastic solution to their problem.  This solution is represented by a generous offer made by radical Islamist groups in several areas of Baghdad, Baqubah, Al-Ramadi, and Fallujah: 'a heroic attack' against the Iraqi police or the occupation forces in return for $1,000."

Ali Abd-al-Amir goes on to report: "These groups visit certain mosques where they watch youths and listen to their views on political and social issues.  At a later stage, they urge them to join jihad operations and make them this offer: $1,000 for every operation against the Iraqi police or the occupation forces.  The amount will be tripled in the event of the success of the operation."  The reward for hitting a US tank and killing its crew is said to be $5,000.

But there is stick as well as carrot.  Ali Abd-al-Amir reports: "Radical Islamists...kill anyone who does not accept their offer.  This was what actually happened to Ihsan al-Fallahi, a young man who refused to join the 'jihad work'."

END

COURCYINT SPECIAL BULLETIN

To: All Courcy's Intelligence Service members

Date: 1 August 2003

From: Joe de Courcy, Chief Executive, Courcy's Intelligence Service

Subject: RUSSIA: THE REGIONS v THE CENTRE

SUMMARY

In this week's Courcy's Intelligence Review (CIR), we focused on the power struggle between the Kremlin and the "oligarchs" - that is those who control federal-level business in Russia.

We quoted extensively from an analysis - admittedly self-interested - by exiled oligarch Boris Berezovsky in which he identified the five main elites in Russia today.  He listed these as being the bureaucracy, the special services, the regional elites, the army, and the oligarchs.

Although this week's CIR dealt principally with the contest between the Kremlin and the oligarchs, we concluded that the struggle with longer term significance was that between the centre and what Berezovsky terms "the aggregate of regional elites", that is the governors, regional politicians, and associated businesses, whose main strategic interest according to Berezovsky is "the retention and expansion of political and economic power in their own region".

ANALYSIS

The struggle between the centre and the regions has been going on since the collapse of the Soviet Union, and under President Putin it is the centre that has been making the gains.  Nevertheless, this power struggle has not yet fully worked itself out, and in this continuing contest between the regions and the centre, the position of the Russian Far East (RFE) has particular importance.

One of the key areas of difference between the Kremlin and the RFE concerns relations with China.  For larger geopolitical reasons, President Putin has sought very close relations with Beijing.  However, the further east you go in Russia the more suspicion there is of China, and the RFE has an interest in developing a much broader "foreign policy", seeking close economic relations with Japan, South Korea, and the west coast of the US to counter the threat of domination by China.

The attached Special Report - published last November by our associated service: the Asia Intelligence Service - looks in depth at the economic and political interaction between the Russian Far East and the rest of Asia.  It makes particularly interesting reading in the light of Berezovsky's comments about the role the regional elites in Russia today.

To access this report (which is normally available to Asia Intelligence Service members only), just click on the following link:

http://www.asiaint.com/special/secure/AsiaRFE-DEI.pdf

END

COURCYINT SPECIAL BULLETIN

To: All Courcy's Intelligence Service members

Date: 24 July 2003

From: Joe de Courcy, Chief Executive, Courcy's Intelligence Service

Subject: IRAQ AFTER UDAY AND QUSAY

SUMMARY:

The elimination of Uday and Qusay Hussein on Tuesday was a welcome development that has given a much-needed boost to the morale of both the US and British governments. However, the success was a purely tactical one with no long-term strategic significance. There are forces at work in Iraq that are of far greater importance.

ANALYSIS:

Although Uday and Qusay undoubtedly continued to control huge financial resources and theoretically continued to control significant military forces that survived the fall of Baghdad (because they melted away rather than fought), the regime was finished from the moment the coalition forces invaded Iraq regardless of the particular fates of Uday, Qusay, or even Saddam himself.

In other words, rejoicing at the deaths of Uday and Qusay, while fully understandable, is a bit like a salesman celebrating every stage of a single order with equal enthusiasm, from the first indication of interest through the written order to the final payment. The end of Saddam Hussein's regime was a "done deal", and the deaths of Uday and Qusay have added little more than a written acknowledgement.

The problems that the United States and Britain face in Iraq are to do with the future not the past, and what resistance there has been so far is more a reflection of Arab Sunni fears about the future than a desire to see the return of Saddam Hussein. The minority Arab Sunnis understand all too well that, having brutally suppressed the majority Shias and Kurds for more than three decades, their future is extremely precarious.

The key point to keep in mind is that because of the ethnic/religious divisions of Iraq, the country is as unsuited to a democratic solution as was post-communist Yugoslavia.

In view of this, the coalition's options appear to be limited to the following:

1. An indefinite occupation by coalition forces with a marginal spreading of the burden among willing allies. The advantage of this would be to delay other unwelcome developments (see below) while putting off any admission that the coalition's stated objective of turning Iraq into a beacon of free-market democracy for the whole Middle East is unobtainable.

However such a policy would face increasing resistance within Iraq (spreading in time to the Shia as well as Sunni communities) and would feed opposition in America and Britain at a progressively delicate time in the electoral cycle for both George Bush and Tony Blair.

2. A relatively quick withdrawal, preferably by way of a handover to an interim administration by the United Nations. The advantage of this approach is that it would reduce the risk to American/British lives and reduce costs. However, as India has just made clear, no one is particularly keen to pick up the baton (poisoned chalice?) - and the risk of premature withdrawal without an alternative force to hold the ring is that Iraq would rapidly dissolve into civil war.

3. A decisive shift in policy about the future of Iraq, moving away from any hope of establishing a free-market democracy in a unified Iraq towards the division of Iraq into Shia, Arab Sunni, and Kurdish entities.

The advantages of such a policy shift could include the establishment of a pro-US administration in the Kurdish region and (if subtly played) a relatively pro-US regime in the Sunni region as well. The disadvantages would include a major split with Turkey (possibly even to the level of military confrontation) over Kurdish independence and the spreading of Iranian influence into the Shia areas of Iraq, thus effectively conceding a pro-Iranian sphere of influence from the borders of Pakistan to the Mediterranean coast of Lebanon.

CONCLUSION:

The problem is that all of the above entail significant disadvantages that appear to outweigh their respective benefits, and as a consequence the most likely outcome is one of drift.

At the moment, the US and Britain are still hoping that they can establish a respectable semi-democratic government for a united Iraq (option 1), and this will continue for the time being.  But as domestic electoral imperatives progressively intrude on policy (and as the difficulties within Iraq mount), so the necessary will and staying power to impose such a solution will fade, and the desire to share the responsibility more widely will increase.

However, if events push the US and Britain towards a desire to share their responsibilities more widely, so the enthusiasm within the international community to participate in the rebuilding of Iraq (option 2) will almost certainly recede in direct proportion. In other words, this is likely to prove a zero-sum game.

But if we are right about that, then the end result could yet be option 3, albeit by an unstructured degeneration rather than by any carefully planned progression.

END

To: All Courcy's Intelligence Service subscribers

Date: 4 April 2003

From: Joe de Courcy, Chief Executive, Courcy's Intelligence Service

Subject: SYRIAN MISJUDGEMENTS OVER IRAQ

DEVELOPMENT:

There has been a barrage of reports in recent days, many originating in Israel, about Syrian support for Saddam Hussein's regime.

ANALYSIS:

In our analysis of the likely shape of the world after Saddam Hussein published in the 12 February issue of Courcy's Intelligence Review - http://www.courcyint.com/crl/crl1700.asp - we talked in particular about the emergence of a strong Iran/Syria-Lebanon axis, linked by the strengthened Iraqi Shi'ites and in all likelihood backed by a Russia no longer having to juggle its support for Iran with its support for Iraq.

Nothing that has happened since has altered this analysis.  However, particularly given the recent reports about Syrian support for Saddam Hussein, it is now important to elaborate a bit further on the position of Syria.

The first point to make is that Syria, since the death of Hafez al-Assad and the succession of his son Bashar, has in recent years become even closer to Iran than was previously the case.  Assad senior might have backed Iran in the Iran-Iraq war of the 1980s, but he was careful to limit the extent of Iranian influence within Syria (in particular keeping Iranian Shi'ite clerics out of the country).  Assad junior on the other hand, who amongst other things reportedly views Iranian-backed Hassan Nasrallah of Hezbollah as something of a guru, has allowed Iran to increase its influence within Syria.  For instance, there are now said to be some 30 or more Iranian-influenced religious schools within the country.

When put alongside intelligence about the possible transfer of Iraqi weapons of mass destruction to Syria, this supports our projections about the likely potency of the post-Saddam Iran-Syria alliance - a potency that will increase in proportion to the amount of influence secured by the Shi'ites in post-Saddam Iraq.

However, Assad appears to be misjudging the situation and jeopardising the potential gains.  Syria's best interests would be served by accepting whatever weapons Iraq wishes to transfer to safe keeping (like Iran did with the Iraqi fighters during the first Gulf War) and paying lip service to Arab solidarity with the Iraqi people while providing as little as possible by way of direct help or succour to the beleaguered and sure-to-be-defeated Saddam regime.  Instead Damascus has supported the dying regime too openly, giving Israel the evidence it needs to ensure that the Syrian danger looms large on America's radar screen.  And in this Israel has clearly been successful judging by the recent warnings issued to Damascus by Secretary of Defence Donald Rumsfeld and Secretary of State Colin Powell.

So while the threat of a much strengthened (and radicalized) post-Saddam Iran-Iraq-Syria-Lebanon axis clearly exists and is likely to grow (particularly if the Shi'ites gain the ascendancy in Iraq), a combination of Israeli lobbying and Syrian misjudgement is combining to ensure full American recognition of the threat.

Interestingly, this habit of misjudging crucial moments appears to be an Assad family trait.  Assad senior had a reputation in the West as being a cunning leader of exceptional guile, but his record never supported such an assessment.  It is worth recalling, for instance, that:

- he failed to regain the Golan Heights by war in 1973

- he failed to stop Egypt making separate peace with Israel in 1979

- he failed to prevent Israel’s invasion of Lebanon in 1982

- he failed to adjust to the collapse of the Soviet Union

- he failed to turn the post-Gulf War Damascus Declaration into a genuine tool for influence over Saudi Arabia and the other Gulf Arab states

- he failed to see that Shimon Peres really wanted to return the Golan Heights

- he failed to prevent the Palestinians and Jordan from making separate peace with Israel, and

- he failed to stand up to Turkey over water and over Syrian support for the Kurdish PKK guerrilla group

The one genuine success that can be attributed to Assad senior was keeping Islamist militancy at bay, but this was achieved only by dint of extreme brutality and ruthlessness - and, as noted above, that success is being jeopardised by his son.

Now, following in the solid tradition of his father, it seems that Bashar is misjudging how to act at another crucial historical turning point, and this misjudgement must surely limit to one degree or another the considerable gains that Syria looked certain to make from Saddam's demise.

END

To: All Courcy's Intelligence Service subscribers

Date: 25 April 2003

From: Joe de Courcy, Chief Executive, Courcy's Intelligence Service

Subject: TERRORISM - A CURRENT THREAT ASSESSMENT

DEVELOPMENT:

There has been surprise in some quarters that the US-led attack on Iraq has not produced a major terrorist response.

ANALYSIS:

The lack of a major terrorist response to the US-led attack on Iraq in fact mirrors the experience of 1991, and the following points are germane:

1. Islamist-inspired terrorism is fuelled by grievances that long pre-date the US-led attack on Iraq and that will long survive the restoration of Iraqi rule in Baghdad. The perpetration of major acts of anti-Western terrorism, therefore, is dependent on the capacity of the terrorists to act rather than the immediate result of any specific policy (such as the invasion of Iraq).

2. The downward trend in international terrorism since 9/11 indicates that the capacity of al-Qaida to strike against Western targets has been significantly diminished - and commonsense suggests this must be so for the following reasons:

* The group's bases in Afghanistan have been destroyed and significant leaders have been killed or captured.

* International intelligence agencies have been collaborating in a far more systematic way since 9/11. The positive effect that this can have was demonstrated at the time of the last Gulf War in 1991 when very few attacks on Western targets were successful. What attacks there were tended to be minor and on the periphery. That has been the case this time as well.

* One major consequence of the Iraq war is that it has demonstrated to anyone who doubted that the current United States administration is not to be fooled with. This has had a salutary effect on all would-be state-sponsors of terrorism, and a severely degraded al-Qaida is now operating in a much less accommodating environment than was previously the case. No state wants to be found with an al-Qaida smoking gun in its hand.

* Saudi Arabia, in particular, will have been frightened by the tone of last year's Rand Corporation report that stigmatised it as the "kernel of evil". The fact that the author of the report was subsequently released by Rand would not have diminished the impact of the report in Riyadh.

* Likewise in Pakistan, President Musharraf is under no illusions as to what would happen if he were to go soft on al-Qaida. It is true that he is maintaining (even increasing) his support for Kashmiri militancy, but worrying though this is it remains a local issue.

3. Although the capacity of al-Qaida has been greatly reduced for the reasons given above, it could still strike at the periphery without too much trouble. But there are problems with this. The Bali bombing (committed by an affiliate organization) achieved little for the cause while producing widespread revulsion among Indonesia's moderate Muslims.

The huge success of the 9/11 attacks adds to the problem for al-Qaida. It would take something extraordinarily spectacular to top the impact of 9/11, whereas a thwarted attack or one that lacked the emotional significance of 9/11 would be seen as a failure.

CONCLUSIONS

The danger posed by non-state terrorism has always been the limitation of deterrence. States can be deterred, but groups of fanatics cannot be. However, they can be harried and hounded and spied upon - and their bases can be destroyed. Furthermore, mounting a major terrorist outrage is more difficult than it might at first sight be thought, and without the tacit support of rogue states al-Qaida's task has become more difficult still.

This is not, for a moment, to say that there is no danger, but it explains the current quiescence and why less has been heard from al-Qaida in the present circumstances than some thought likely.

It goes almost without saying that there remain great dangers ahead, and the negatives include:

* The Islamic world has an inexhaustible supply of grievances and therefore of potential recruits to the terrorist cause.

* There are still many places where terrorist cells and networks can flourish - from the teeming cities of Indonesia, Pakistan, and even Europe to the remote places of South-East Asia, Central Asia, and the Horn of Africa. The expatriate Arab communities as far afield as South America (in the tri-border area for instance and in Venezuela's Margarita island) provide funds and places of refuge.

* Fanatics can now acquire the means to kill on an unprecedented scale.

The key to future security will be continuing international cooperation and relentless pressure on any states showing signs of renewed support for al-Qaida or similar groups. All the indications are that the Bush Administration will continue to insist on the former and will not shy away from the latter (except possibly - and dangerously - in Pakistan).  However, there is no such thing as an impregnable defence.

END

To: All Courcy's Intelligence Service subscribers

Date: 24 March 2003

From: Joe de Courcy, Chief Executive, Courcy's Intelligence Service

Subject: THE BATTLE FOR BAGHDAD

Four days into the war against Iraq, optimism about a sudden capitulation of the Iraqi regime is fading, and consequently fears about the possibility of a fierce fight for Baghdad are increasing. If it does come down to a fight for Baghdad, the following extracts from an article in last Wednesday's Jerusalem Post provide as good a description as we have seen of the difficulties of urban warfare. Israeli military researcher Yigal Henkin wrote:

“Human disaster in warfare is nothing new, but urban warfare is worse, particularly for civilians caught in the crossfire, and, as was made clear in the World War II battles of Stalingrad, Aachen, and Saint-Lo, to name just a few, they are a nightmare for advancing armies. Urban theatres necessitate intense fighting at close range, neutralize attacking forces’ greater numbers and technological superiority, and the presence of civilians makes targeting enemy combatants, or even finding them, very difficult. This is why political scientist Michael Desch called urban battles ‘the great equalizer’. Analysts predict that the coming war in Iraq will not be fought in sterile deserts but rather in heavily-populated cities like Baghdad. If American forces are to be successful in their fight against Iraq, they have to learn the lessons of the past.

All war may be hell, but city battles are that much worse: Defending troops not only possess greater familiarity with the terrain, but often have had ample time to plant mines, position snipers, and set up ambushes. The advancing army has to rely on ground troops, supported by tanks and armoured personnel carriers, while the defending army traditionally prevents substantial air or artillery support by ‘hugging’ the advancing troops: engaging them at close range so that any air or artillery support risks hitting the advancing army’s own soldiers, that is, even if the attacking force doesn’t limit its fire supply because of civilian presence in the area.

If so, as most likely will be the case in Iraq, the task becomes even more complicated. Cities’ electrical grids and ‘urban canyons’ render most combat communications systems worthless; short-wave radios and cell phones will work, but army radios may be jammed. Each soldier has to maintain an extra level of awareness: Snipers and other attackers can engage them not only from the front, back or side, but may be hiding on the upper floors or roofs of buildings filled with civilians, or in sewers below. Meanwhile, identifying enemy combatants from non-combatants is difficult. Smoke and fire make targeting that much harder; every soldier knows that each shot might hit a civilian and any mortar shell might destroy someone’s home...

In keeping with the habits of dictatorial regimes, Iraq has no compunctions about using civilians for shelter and cover. They are equally likely to use civilians as provocations: to shoot from behind civilians and wait for American troops to return fire, then showboat the corpses and damage for the press and decry ‘American aggression.’ Saddam might even resort to shooting his own citizens and blaming it on American forces. As much as possible, American army officials must try to encourage civilian populations to clear out of areas where there is fighting...

Once the battle begins in Baghdad, targeting, shelling, and D9 bulldozers can help encourage stalwarts to clear out or, at the least, stay out of sight. American soldiers would also be well served by staying out of sight. Both recent Marine Corps studies and Israeli experience show that most casualties in urban fighting are suffered while soldiers are moving in the streets. Israelis themselves applied this lesson when they took the casbah in Nablus about the same time as the battle in Jenin. Rather than expose themselves in the streets, soldiers cut holes in the walls between houses and moved through them. Additionally, Israeli snipers positioned themselves in tall buildings to prevent Palestinian fighters from operating in the streets while the Israeli forces operated in ways specifically designed to confound their enemies’ expectations. One Palestinian fighter told Amnesty International that ‘the Israelis were everywhere, behind, on the sides, on the right and on the left. How can you fight that way?’

One major attribute of the Israeli advance was its unpredictability, according to Col Aviv Kochavi, commander of the paratrooper brigade that took the casbah. Using the technique known as ‘swarming,’ where many small units move without obvious logic, they infiltrated and attacked from the inside out, in zigzag patterns, and otherwise unexpected movements.

New American combat doctrines, which call these sorts of tactics ‘nonlinear warfare,’ will try to take advantage of urban chaos. The success of these new tactics is dependent largely on intelligence gathering. Not only do ground troops need to know the city map well, they need to know who lives in it, who has interests and where, who is a follower of whom, and who has it in for whom. Troops need to target battle command and communication centres, the hubs that permit the enemy to fight, and break the fighting will and spirit of the other side.

To gather the information necessary, American forces need translators fluent in Arabic and in all the dialects spoken in the combat theatre. (For any successful psychological operations, they also need cultural translators: the now-legendary attempt to intimidate American soldiers in the first Gulf War by warning them that, back home, their wives and girlfriends were being seduced by Bart Simpson was, suffice to say, less than effective.) Enemy troops, along with civilians, need to know that prisoners will be treated fairly and that American forces do not have any intention of destroying their homes or killing their families, contrary to Iraqi propaganda. Needless to say, psy-ops will succeed only if American actions are consistent with these claims.

Avoiding unnecessary collateral damage is not only moral, but tactically savvy. Americans should go in with every means necessary to complete the mission in accordance with the rules of engagement. They should not wait until soldiers start dying before unleashing the complete arsenal. Decisiveness does not mean being brutish without limits. If Americans want to enable Iraqis to not stand with Saddam, they must avoid giving them more reasons to do so. In the words of the late Russian general Alexander Lebed, nothing makes a more determined fighter than a man who goes to work in the morning and returns in the evening to find his neighbourhood destroyed and his family killed.

Ultimately, American troops must hope for the best, but plan for the worst. After all, city combat was hell, is hell, and probably will continue to be hell for the foreseeable future. The job of American military planners is to get it over as quickly as they can.”

END

To: All Courcy's Intelligence Service subscribers

Date: 20 February 2003

From: Joe de Courcy, Chief Executive, Courcy's Intelligence Service

Subject: KEEP ONE EYE ON CHINA

SUMMARY:

There have been two main pillars to world confidence since the end of the Cold War: the underlying stability of the global security environment and the rapid economic transformation of China, the world's most-populous country.

Everyone recognizes that the first pillar is being put under the most intense strain by the Iraqi crisis, however judging by the vast amounts of foreign direct investment (FDI) still flowing into China there are few concerns about the second pillar. We would like to issue a note of caution.

ANALYSIS:

China remains the pre-eminent magnet for foreign direct investment, absorbing around $53bn in 2002, more even that the United States and at least 10 times more than the only other comparable developing economy: India.

The attraction is cheap labour, a huge domestic market, and growth of around 8% per annum. Our concerns are fivefold:

1. Unreliable figures. The economic figures that underlie much of the enthusiasm for China are unreliable. Work done by Thomas Rawski of the University of Pittsburgh, for instance, suggests that while figures up until 1997 are more or less reliable, that "confidence in official GDP measures ends abruptly in 1998" - the year in which the government launched a series of policy measures aimed at sustaining rapid growth.

According to Rawski's work, the Chinese economy grew by no more than 2% in each of 1998 and 1999 when official figures recorded growth of 8% and 7%. Some economists even believe there might have been a contraction in those years given that aggregate energy use fell by 4.3% in 1998 and by 7.7% in 1999. And even though performance has improved since 2000, there are good reasons for believing that growth could still be only about half the reported figure.

Rawski points out: "A persistent pattern of declining commodity prices, near-zero employment growth, sluggish consumer demand, low expectations on the part of Chinese households, slow growth of private investment, repeated postponement of plans to wind down fiscal pump-priming, and widespread excess supply of both commodities and production capacity…[are all real] phenomena… None is in dispute. And none is consistent with the historic experience of high-speed growth in Japan, Taiwan, Korea, Hong Kong, Singapore, South-East Asia, and, prior to 1998, in China."

Of course Rawski has his opponents, but the uncertainty about China's true economic performance is real, and this on its own must be a reason for a high degree of caution.

2. Public finances. If there is uncertainty over the performance of the Chinese economy, the problem is compounded by concerns over the degree to which performance (whatever it might be) has become dependent on huge government deficit spending on unproductive projects. The deficit was a record $37bn in the fiscal year ending March 2002, up 19% on the previous year.

Although the deficit is only 3% of GDP, and while the cumulative burden might officially amount to only 17% of GDP, when pension liabilities and bad loans of state-controlled banks are included, the real burden is more like 100%-150%. Bad bank loans are now estimated to total $400bn-$600bn, or about half of annual economic output. Unfunded pension liabilities from defunct state companies also total some $600bn.

3. Unemployment crisis. The desperate need for further reform of state-owned enterprises and the banking sector (under China's WTO-entry agreement, the banking sector should be fully liberalized by 2006) will further exacerbate an already serious unemployment crisis.

It is estimated that there are 36m unemployed Chinese in urban areas, and it is thought that 35% of the 140m workers employed in the state sector are surplus to requirements. In addition, there are thought to be 100m surplus rural labourers (the same number as the entire population of Bangladesh), with WTO accession threatening a further 20m rural jobs.

4. Weak leadership. All the above and other problems will be compounded by the transitional nature of China's present leadership following the changes in November - a transition that could take as much as five years to work its way through.

5. The military. Finally, one positive about China over the years has been that (unlike the Soviet Union) it has not over-burdened itself with military expenditure. But with the leadership in flux, the military has been reasserting its position within the Chinese power structure, winning double-digit budget increases.

Given growing fears over American military power (certain to be exacerbated by an attack on Iraq), continuing concerns over Taiwan, and the fact that the only position of power that former leader Jiang Zemin is likely to retain is chairman of the Central Military Commission, it seems highly likely that the burden imposed by the military on the Chinese economy will increase.

CONCLUSION

We are currently witnessing a major upheaval in the global security environment, with the fissure between America and Europe, a loss of faith in the United Nations, the further radicalization of the Islamic world, uncertainty over how to deal with North Korea, and the likely coalescence of countries fearful of American power around China and Russia.

A simultaneous crisis over China's economic advancement would be a further major blow to confidence and stability. It is not certain, but it is possible - and subscribers need to factor it into their calculations.

FURTHER READING

The following reports produced by CourcyInt's sister organization - the Asia Intelligence Service - are relevant and should be of interest. Just click on the links below to access these reports:

* China's banks face competition deadline - AsiaInt Economic Intelligence Review, (EIR) February 2003, http://www.asiaint.com/arl/arl1708.asp

* China preparing for next stage of land reform - AsiaInt Economic Intelligence Review, January 2003, http://www.asiaint.com/arl/arl1563.asp

* The transitional appearance of China's new leadership - AsiaInt Political & Strategic Review, December 2002, http://www.asiaint.com/arl/arl1481.asp

* China begins to face unemployment crisis - AsiaInt Economic Intelligence Review, December 2002, http://www.asiaint.com/arl/arl1500.asp

* The struggle to modernize rural China - AsiaInt Economic Intelligence Review, October 2002, http://www.asiaint.com/arl/arl1354.asp

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