Author: Ben Debski

Businessman Ulrich Weitz leans forward and produces a graph showing a tenfold increase in his company’s turnover in the last 15 years.

“We’ll end this year with a profit,” he says, a picture capturing the fall of the Berlin Wall hanging behind him in his office in the historic eastern German city of Weimar.

Weitz’s business is a success story – one of a clutch of technology firms in the East whose growth since reunification in 1990 has helped the region narrow the gap with the West.

Twenty years after the fall of the Wall, much of the eastern economy has cast off the shackles of its Communist past, thanks to over a trillion euro in state transfers from the West which have helped drive a wholesale restructuring.

Productivity has almost doubled since 1991 and economic output per inhabitant climbed last year to some 69 percent of the level in western Germany, up from 33 percent back in 1991.

The changes have come at a price. Whereas the German Democratic Republic (GDR) boasted full employment, vast swathes of the East now suffer stubbornly high unemployment, running at 11.8 percent. It is 6.6 percent in the West.

Many of the stinking, smoke-belching chemical factories of the south so beloved of communist propagandists have shut down. The air is cleaner but traditional jobs have gone forever.

Many young people are leaving the region, meaning companies will face a shortage of skilled labour in the coming years. The East’s population has declined by about two million since 1990.

“There are flourishing landscapes and there are a lot of wastelands,” said Udo Ludwig, an expert on the East at the IWH economic think tank.

The government is aiming for the eastern states to catch up with the poorest western states by the end of 2019 when the “Solidarity Pact”, a package of special aid, will end.

In 2006-08 alone, eastern states received EUR45bn in subsidies for investment in the economy and infrastructure.

Subsidy pay-off
The East is finding its feet. In a report entitled “East On The Up”, Deutsche Bank economists said they expected the region to suffer less from the global economic downturn than the West as it is less industrialised and export-reliant.

None of Germany’s blue-chip DAX firms are based in the East.

“The East German economy no longer has an overriding reliance on economic development (aid), but instead is supported by increasingly independent small – and medium-sized firms, and by a few islands of big industrial production,” they added.

Many such successful eastern firms have morphed out of enterprises that existed under the GDR. In Jena, stock market-listed high-tech engineering group Jenoptik evolved out of conglomerate VEB Zeiss Jena.

In Weimar, 20 workers at a former GDR research institute teamed up with west German multinational engineering group Glatt in 1991 to found Glatt Ingenieurtechnik, which now employs 120 people. The deal gave the researchers new opportunities.

“The world suddenly opened up for us,” recalls Karlheinz Ruempler, now business development manager at the company.

Weitz bought his firm, IBU-tec, a high-technology materials manufacturer, in 2001 when it was almost bankrupt after the state axed subsidies it had depended on for a decade. He turned the company around but also credits those subsidies for some of the firm’s success.

“We still resort to things today that were generated back then,” he says.

One of the biggest challenges Weitz has faced in building up his business is recruiting the highly skilled workers he needs to work in areas like nanotechnology – a process that allows the production of high-grade materials.

He has had to attract people from western Germany.

“I don’t think you can make it as a technology company with just workers from eastern Germany,” says Weitz, who was born in Weimar but grew up abroad as the son of a diplomat, before studying in West Berlin.

“You have to know and understand the mindset of your customers… A lot of people here can’t speak English,
and that closes the route to the international market.”

He says he would have had a tougher time attracting talent if his company was not based in Weimar, a university city and UNESCO world heritage site: “Weimar helps hugely.”

Skills shortage
Both Weimar and Jena, home to Jenoptik, are in Thuringia, the eastern German state with the lowest unemployment rate, at 10.1 percent. In Berlin, joblessness is running at 13.6 percent.

Bleak prospects for many young people in less successful eastern towns and cities mean they leave the region.

“Each year, around one percent of the population between 18 and 29 years of age disappears,” said Harald Uhlig, economics professor at the University of Chicago.

IWH economist Ludwig said the key to eastern Germany’s economic future lay simply in educating its young people.

“Three things are important: firstly education, secondly education, and thirdly education,” he said.

Deutsche Bank’s economists agreed, writing in their report that the eastern states need to help young people find jobs.

The biggest dangers facing the region in the medium term stem from discontent with life in the East leading to a drift away, they wrote, adding: “Unhappy citizens are not good for economic development.”

Weimar taxi driver Dirk Richter, 40, thinks the government should do more to help young people find work but that many easterners his age expected too much when the Wall fell. He said life can be tough and he sometimes only earns ¤2 an hour.

“Despite everything, I’m happy,” he added. “If people kept their feet on the ground, they’d be fine.”

Medvedev recently criticised Putin’s government for allowing the environment to slip to the bottom of its agenda and said he would throw the weight of his presidency behind fixing it, although he did not criticise Putin by name.

Non-government organisations say the environment suffered serious damage because of lax regulation during the oil-fueled boom that coincided with Putin’s eight years as president.

Medvedev ordered the government to draft a new 20-year environmental plan and introduce compulsory environmental classes in schools, the Kremlin said in a statement.

Compulsory environmental studies on new building projects – which dropped in 2007 amid a building boom – must be re-imposed, he said.

The government was also ordered to create a survey of environmental damage and a list of proposals to alleviate it, including in the Amur River, where Russia says Chinese factories have dumped toxic waste in recent years.

The orders were drafted after a closed government meeting headed by Medvedev in May, the statement said.

A Greenpeace report warned that the environmental situation in Russia has deteriorated markedly during the oil-fuelled economic boom of the last decade. It cited Interior Ministry figures to show that the number of environmental crimes had tripled in 2000-2009.

Greenpeace Russia campaign director Ivan Blokov said Medvedev’s moves on the environment were welcome, but warned that progressive regulations had been ignored in the past.

“The current environmental doctrine was adopted in 2002, and it contained very reasonable statements which we liked,” Blokov said. “As far as I know, few of the provisions have been fulfilled so far.”

Of the entire power requirement in Niedersachsen,  21 percent is met by wind energy. Prime Minister Christian Wulff wants to increase that share significantly: “Till 2012 we want to produce 26.5 billion kilowatt hours with wind energy; that is fifty percent of the electricity consumption in Niedersachsen. In 2021, Niedersachsen will feed more wind energy into the grid than is consumed in our state.”

Niedersachsen wants to reach that goal with the help of offshore wind parks and the so-called repowering meaning the exchange of older and smaller turbines with new, higher and more efficient ones. Thus, more output with fewer turbines can be realised, doubling or even tripling the overall capacity. Niedersachsen has a lot of these small wind turbines from the beginnings of the industry. Its windy coastal region saw the installation of the first turbines by farmers who sought a second income source. Today, most wind parks are put up by energy suppliers.

Over time and with the advantage of an early start, great expertise has accumulated in Niedersachsen. The German market leader Enercon has its headquarters there as well as numerous other companies such as GE Wind Energy GmbH, Prokon Nord Energiesysteme GmbH, Plambeck Neue Energie AG and Bard Engineering GmbH and their suppliers. They export their know-how worldwide: The companies have an export quota of more than 80 percent. The global wind energy market has increased by 30 percent in 2008 for the last three years in a row, and German manufacturers supply more than a third of the world market. The biggest market for the past four years has been the USA.

The industry is supported by the research institutions located in the state such as the German Wind Energy Institute DEWI GmbH, founded by the state of Niedersachsen and ForWind, the centre for Wind Energy Research of the universities Oldenburg and Hanover. The DEWI provides research and services connected with the realisation of wind farms, while ForWind focuses on the utilisation of offshore wind power.

Natural gas
But Niedersachsen is not only leading in wind energy: It supplies almost 95 percent of the natural gas produced in Germany. The most productive gas fields are located there as well as more than 90 percent of Germany’s gas reserves. Employment rates and investments are increasing annually. According to the Association of German Oil and Gas Producers in Hannover, the number of employers in their member companies has risen by 40 percent since 2004. About 80 percent of all employers are working in Niedersachsen. In 2008, the companies increased their investments in Germany by 43 percent to €555m.

Most of Germany’s natural gas storage facilities are located in Niedersachsen, too, among them the largest in Western Europe. Four billion cubic metres of gas are stored in the WINGAS facility in Rehden. ExxonMobil operates two large storage facilities in Uelsen and Dötlingen, big enough to store 2.6 billion cubic metres. For comparison: 5.1 billion cubic metres of gas are annually produced in Niedersachsen. That is enough to supply more than two million households.

Moreover, the company BEB Erdgas und Erdöl GmbH has constructed one of the largest European gas desulphurisation plants in Großenkneten. It cleans the gas of sulphur to make it usable. That makes the plant one the world’s largest productions facilities for natural gas sulphur. Almost 800,000 tons of sulphur are sold every year, mainly to clients from the chemical industry.

Niedersachsen is also the leading region for bio energy in Europe. There are an estimated 900 biogas plants currently in operation, producing electricity by feeding on liquid manure, biological waste and energy crops. They produce more than a third of the total amount of biogas in Germany and cover approximately five percent of the state’s power requirement. “We will double that share to ten percent by 2012”, announced Christian Wulff in September 2008.

German market leader EnviTec Biogas AG from Lohne expects a growth in sales between 44 and 74 percent for 2009. The company is represented in 15 European countries, India and China. It currently builds the world’s biggest biogas plant, which will be able to supply a town with 50,000 inhabitants with electricity. EnviTec Biogas India was awarded the gold medal in the Asian Power Awards 2008 in the category “Best Decentralised Power Plant in Asia” for the construction of 30 biogas plants in Punjab. 22 percent of the turnover is already realised abroad; the company expects that share to rise to 50 percent in the coming years.

Cogeneration of heat and power
The 2008 amendment of the Renewable Energy Sources Act – a law obliging operators of power grids to give priority to electricity from renewable energies and to pay fixed prices for this – increased the compensation for bio energy and also promotes using the waste heat. Accordingly, the cogeneration of heat and power is increasing. For example, the biogas plant Hortitherm Hinrichsfehn in Wiesmoor was granted an award for its exemplary concept: The waste heat is used by a garden centre to heat their hothouses. The owners of the garden centre build the plant in 2006 because of rising prices for energy.

For the same reason, whole communities are thinking about producing their own power and heat with biomass. One model village even meets its whole energy demand with a biogas plant: In Jühnde, the electricity is fed into the grid, while the heat is transported to consumers as hot water via a district heating network. The community Lathen is also going to build a heating network to supply seven public institutions and a large amount of private households with heat from a nearby biogas plant, thus saving costs and diminishing CO2 emissions.

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The downturn, which has hit the region’s export-led economies hard, is threatening to turn former powerhouses of the communist and post-Soviet eras into a new “rust belt” and causing a surge in unemployment and leaving deep social scars.

Geza Tokodi has worked in the Hungarian steel mill DAM in the northeastern city of Miskolc for 38 years.

The global crisis has brought him face-to-face with the unthinkable: a shutdown of the plant for more than six months, plunging the huge production halls which once employed 18,000 workers into eerie silence.

“My ears got used to the noise of the plant. Quiet is good when you want to have a rest, but here, it’s much worse than noise,” Tokodi says, walking through the vast derelict halls.

The only sound in the vast plant is the occasional crack of metal expanding and contracting as the temperature changes or the cheep of birds that venture in through broken or open windows.

The sprawling steel complex, once called the Lenin Steel Works, developed quickly in the 1950s when the communist government wanted to make Hungary “the country of iron and steel” despite its lack of raw materials and cheap energy.

In its heyday in the 1980s, the city of Miskolc had more than 200,000 residents, most working in industry.

The population has fallen to about 170,000 and unemployment stands at between 15 and 16 percent, well above the national average of 9.8 percent.

DAM, which survived privatisations in the 1990s and was rescued after previous liquidations, is being wound up again and is laying off its approximately 700 remaining employees.

The liquidation process started on June 24th and the liquidator Ratis Kft. has to put the assets up for sale. If it can find an investor, the plant may survive.

Jozsef Papp, 53, who has been at DAM for 36 years, said they had been idle since late last year.

“There have been a few liquidations, and the plant always survived, but I don’t think this will be the case now,” he told Reuters.

Steelmakers throughout Europe have operated at between 55 and 60 percent capacity usage rates this year, shelved investment plans and cut jobs to weather the biggest downturn to affect the industry since World War Two.

Social scars
Miskolc, Hungary’s second largest city, is finding it hard to cope with soaring unemployment and a lack of new jobs.

Agnes Dudas, who heads the employment office in the city, says the number of registered jobless had risen to 18,200 in May from between 12,000 and 13,000 at the end of last year.

More than half of those losing their jobs at the steel mill are aged over 50 and finding new work for them will be difficult, even though the city receives funds from an EU programme partly designed to help crisis-hit regions, she says.

“Those who worked at DAM for 30 to 40 years would have never left this plant. First they must overcome the trauma of all this, and it’s very hard,” Dudas says.

Miskolc has a Roma population of about 12,000 to 15,000, many of whom used to do unskilled jobs in the steel industry and have little choice but to rely on social assistance from the government.

Hungary’s Roma minority is one of the largest in central Europe, accounting for between six and seven percent of the population.

Growing social tension in Miskolc, once a Socialist stronghold, showed in June’s European election results when the far-right Jobbik party won 21 percent of the votes. The Socialists received 23 percent.

“Industries have collapsed and services are not developing at a pace which would allow them to absorb the extra workforce,” said Imre Lakatos, head of the Iron Workers’ Union VASAS who has worked at DAM for 40 years.

Next to the steel works, hundreds of Roma families live in houses with no running water or sewerage.

“Most families here live on social assistance now… and odd jobs,” said Ferenc Botos, who works for the local Roma minority council.

Early retirement offer
Dunaujvaros, formerly Sztalinvaros (“Stalin city”), 70km (43.50 miles) south of Budapest, is the home of Hungary’s biggest steel mill, Dunaferr.

The firm, a unit of Ukraine’s Donbass Group, saw its sales revenues drop by 40 percent in the first quarter and has said it will lay off 400 workers and offer early retirement to several hundred more to try to weather the crisis. It will have a workforce of 7,200 after the restructuring.

The town is faring better in the face of the crisis because of its proximity to Budapest and investment by South Korean tyre manufacturer Hankook in 2006 which created new jobs.

ArcelorMittal’s Czech unit, in the northeast of the country where unemployment is rife, is using only 35 to 45 percent of its capacity because of a lack of orders.

The glut in the steel sector has spread, hurting earnings for London-and Prague-listed New World Resources, which owns the country’s largest hard coal mines.

In the past 20 years, the labour force has shown few signs of changing in many former communist industrial centres.

“It will be difficult to expect any big structural changes in industrial regions because people skilled in heavy manufacturing or mining can’t transfer easily to other sectors of the economy,” said David Marek, an economist at Patria Finance.

“For the regions, it can be a big problem, especially when it comes to a high concentration of heavy industries like steel or coal. It’s a social problem, not only an economic problem.”

The European Commission’s draft budget sets spending at 131.1bn euros ($174.6bn), some 5.9 percent more than in 2010.

Funds for poor regions, research and development and to improve the EU’s economic competitiveness had the biggest increase – by 14.7 percent to 54.6 billion euros.

“The ambition of the draft budget is to continue to promote economic recovery together with the EU Member States,” EU Budget Commissioner Janusz Lewandowski told a news conference.

The EU’s 27 countries are trying to bolster a fragile economic recovery from the worst crisis in decades with fiscal stimuli, but most of them face gaping budget deficits.

EU spending on agriculture, including much-criticised direct subsidies for farmers, is to remain stable at 58.1bn euros.

Many politicians and experts have said EU farm spending, which accounts for more than 40 percent of the budget, is wasteful and distorts international trade.

Lewandowski said crisis-hit Greece should receive some 2.5bn euros in regional aid and about 700m euros in farm funds. This money will be separate from the aid package aimed to prevent Greece from defaulting, now being negotiated between Athens, the Commission, and the IMF.

But the EU’s poorer members from central and eastern Europe will be the biggest recipients of EU aid, whose general proportions are set in the bloc’s long-term spending plan. The current, seven-year plan ends in 2013.

Under the draft, foreign aid is to fall by 2.4 percent to 7.6bn euros, but spending on administration will grow by 4.5 percent to 8.3bn euros.

The EU will overhaul its budget from 2014. Politicians and analysts expect the reform to shift EU spending away from agriculture, although France, long the biggest beneficiary of EU farm subsidies, is expected to oppose this.

The draft budget will now be scrutinised by the EU’s 27 governments. They have in the past cut such spending plans, something the European Parliament is likely to resist.

The EU budget is financed by contributions from Member States, of which Germany is the biggest net payer.

Unemployment in Spain reached 12.8 percent in November, a 12-year high and by far the highest rate in the European Union. It could reach 20 percent of the workforce in 2010 as a slump in construction spreads into the wider Spanish economy, economists say. That is a level not seen since the 1990s and as Spain heads for its deepest recession in 50 years it may trigger social unrest like that of the 1980s, when high unemployment and low wages led to country-wide demonstrations and violent strikes.

Spain makes payouts of up to 70 percent of salaries for up to two years, depending on how long workers have been paying into the social security system. With nearly three million unemployed, many of those laid off during 2008 will come to the end of dole payouts this year and will struggle to make ends meet in a depressed labour market with no sign of paid work.

“This coming year, a lot of people will stop receiving the dole,” said Sandalio Gomez, professor of labour relations at business school IESE. “We could end up with social unrest as people take to the streets to demonstrate.”

The make-up of Spain’s workforce has changed drastically with the arrival of nearly five million immigrants boosting the population by 15 percent over the past decade. Desperate Spaniards who have lost jobs in construction are taking up work they formerly shunned, from cleaning bars to fruit∞picking, displacing immigrants who struggle to find alternative work.

Thousands of Andalusians applied to pick olives for this season’s harvest from December to January, according to an Andalusian job agency, leaving the previous workforce of African immigrants without employment. Despite offers from local authorities to pay their coach fares back to Africa, immigrants are sleeping rough or in homeless shelters in a situation described by one charity as a genuine social problem. Another flashpoint in the southern region was February’s strawberry harvest in Huelva, on the border with Portugal, where migrants traditionally find work.

Felix Veliz, a Madrid-based former construction sector worker from Ecuador who worked for Corman, which installed safety equipment in building sites, says many of his colleagues were forced to sleep rough when the company filed for administration in September. The 49-year old who came to Spain nearly 10 years ago cannot claim dole or seek other work, as under Spanish law he is still tied to his former company while it files for administration.

“All we want is that the judge and the labour authorities reach a decision as soon as possible so we can claim dole or get a job with another company,” he told Reuters at a commercial court in Madrid where he and fellow former employees have put in a plea to break their ties with the company. “This is like a charity case now.”

Married with two adult children, he said he used to earn up to €1,300 per month. His mortgage now costs €1,300 per month. “They started docking our salaries in May,” he said, his hands thrust into the pockets of a blue corduroy jacket in the cold December wind outside the wrought iron doors of the court.

“In July the company stopped paying altogether. That’s nearly six months, up to now. We are living off loans from friends and family.”

Discrimination
Ripples from a crumbling construction sector are spreading out into the wider economy, bringing down peripheral businesses like air-conditioning installers and tile manufacturers. The number of Spanish companies entering administration in the third quarter nearly quadrupled from the year-ago period, according to the National Statistics Institute.

“It’s the domino effect from the construction sector,” said Jose Luis Corell Badia, a Valencia-based lawyer and head of corporate restructuring at Ernst & Young Abogados. “I don’t see light at the end of the tunnel. It’s job destruction.” Cristina Ballesteros, a 29-year old former secretary for the vice-president of a multinational cement company, said competition for work is such that potential employers ask her if she plans to have children, even though it is illegal to do so.

She lives with her boyfriend but has taken to saying she is single to improve her chances. “I share a rented flat, but if it was not for that I’d be back living with my mother,” she said.

“I studied to be a secretary: it’s not a degree, it’s a two-year diploma, but now I find there are many employers who want you to have a degree to do a secretary’s job. People accept it, because they have no choice. They are asking for more and more, when it’s really not necessary.”

Outside the Madrid commercial court, others are fighting to receive payments to which they are entitled. Rafael Pliego, 54, was recently fired from his job as a security guard and has already signed up for dole but not yet received his cheque. “I have an illness and they told me I couldn’t continue working and they fired me. It happened on October 30th. I had only been working with them for five months,” he said.

“I carry on looking for work, of course. I had the bad luck to get sick, and this happened.”

Spain’s government ran the second highest surplus in the euro zone in 2007, equal to 2.2 percent of GDP, but the public accounts are sinking into the red as tax income falls and the number of people claiming unemployment benefit rises.

The central government budget deficit leapt to ¤14bn in the first 11 months of 2008 – equivalent to 1.28 percent of GDP. The central government deficit is part of Spain’s wider public sector budget, which includes the social security system, regional and municipal accounts.

Social security payouts alone in 2009 will double to three percent of gross domestic product, according to FUNCAS savings bank consultancy. “It’s grown this year at an incredible rate,” said FUNCAS analyst Angel Laborda.

FUNCAS forecasts for the budget deficit in 2009 and 2010 are already obsolete, he said, and will probably come in at around six percent of GDP in 2009 and 7.5 percent in 2010. That would shatter a European Union limit of three percent of GDP.

Prime Minister Jose Luis Rodriguez Zapatero said that the country would start to see the first shoots of economic recovery within the coming year. “The first signs of economic recovery, in the government’s opinion, will be in the second part, towards the end of 2009. We will be at a point when confidence starts to recover,” he said in an interview broadcast on his party’s Web site.

But Vicente Balmaseda, 36, who lost his job as a conference stand designer and has been studying to improve his chances as he looks for fresh work, is pessimistic. “I’ve sent around 200 resumes, every day I send them. At best I’ve had three or four interviews. I’ve only had one direct interview with a company, the rest were with agencies.

“It’s getting me down. The job market in Spain is bad across all sectors. From what they say on the TV, it’s only going to get worse.”

The bartering illustrates the effects of sanctions on one of the
world’s most isolated, repressive countries, along with surging
inflation and the military junta’s curious decision to stop printing
small notes, experts say.

“How shall I give it to you? You want coffee-mix, cigarettes, tissues, sweets or what?”

That
question is heard often in shops and restaurants in the former Burma,
where coins and small notes disappeared years ago and other notes have
now started to follow suit.

State banks were main source of
small notes for shop-owners, but they stopped issuing new currency
several years ago. Today, beggars who collect money on the street now
provide shops with the bulk of their small notes, often in return for
food.

Rampant inflation also plays a role. Consumer prices rose
by an average 24 percent a year between 2005 and 2008, according to the
Asian Development Bank. That has taken a toll on Myanmar’s currency,
the kyat.

Officially, the kyat is pegged at 5.5 per dollar. But
it fetches nowhere near that, trading instead at about 1,000 per
dollar. The cost of printing small notes is now far more expensive than
the face value of the notes themselves.

A Yangon government high school teacher said most of her pupils had never even seen coins or small notes.

Sweet currencies
In
the commercial capital, Yangon, 100 kyat (around 10 US cents) is worth
a sachet of coffee-mix or a small container of shampoo. Tissue packets
or a cigarette or sweets are the equivalent of 50 kyat.

“The
shopkeeper gave me three sweets for change of 150 kyat when I bought a
bottle of cough mixture last week,” said Ba Aye, a Yangon taxi driver.

“When
I told her that sweets would make my cough worse, she offered me a
Thai-made gas lighter. When I said ‘I don’t smoke’, she then asked me
to accept three packets of tissues that would be useful for my runny
nose.”

General-store owner Daw Khin Aye said most of her customers preferred small items like sweets to notes.

“The
small notes that are in circulation are in very bad shape – worn out,
torn, stained, dirty and in most cases stuck with tape,” she said.

In Sittwe, the capital of western Rakhine State, teashop owners manufacture their own coupons to use as currency.

“It’s far more convenient to use these self-circulated notes instead of small items,” teashop owner Ko Aung Khine said.

“But
you need to make sure coupons can’t be forged. Mostly we use a computer
to print it with the name of the shop, face value and signature of the
shop owner,” he added.

Officially there are 13 denominations of
notes in circulation – starting from 50 pya (one cent) up to 5,000
kyat. But only the three big notes (200, 500 and 1,000 kyat) are
common. The rest are growing scarcer by the month.

“So far as
I know, they print only 1,000 kyat notes now,” said a retired economist
from Yangon University. “The cost of printing is far higher than the
face value of most small notes… so they now print just the biggest
ones.”

How much money is in circulation is anyone’s guess.
Myanmar has not publicly released money supply data since 1996-97, when
it put the value at 179.82 billion kyat.

Asked by reporters for the latest figure, a senior government official replied: “We cannot tell you. It’s a state secret.”

The Democratic Party needs to win a majority in the poll for parliament’s upper house in July or August to smooth policy-making, but the scandal linked to its powerful number two official, Ichiro Ozawa, has hurt voter support.

Failure to win an outright majority would leave the Democrats depending on two tiny but vocal coalition partners needed to pass bills in the upper chamber, possibly leading to pressure for bigger spending that could push up bond yields.

To try to turn the tide, party lawmakers have lashed out at prosecutors, whose image as standard-bearers of justice has already been hit by criticism of high-handedness in recent years.

The strategy might woo back voters, but the face-off could also backfire if Prime Minister Yukio Hatoyama and his party are perceived as trying to abuse their political clout.

The Democrats’ complaints include suspicions that prosecutors are unfairly targeting Ozawa and that they are leaking details on the case to media in a bid to manipulate public opinion.

“The media’s impact on public opinion has been huge, to the point that many people now think that Ozawa has done something wrong,” said lawmaker Toshio Ogawa, a former public prosecutor who is part of a team looking into possible leaks.

“It’s hard to say what the prosecutors’ motives are, but in the worst case, they want to build public support for the investigation because they are struggling to build a case without firm evidence.”

A spokeswoman for the Tokyo District Public Prosecutor’s Office declined to comment.

Ozawa has denied intentional wrongdoing, but may voluntarily submit to questioning this weekend, media said.

Three of his current and former aides were arrested last week on suspicion of improperly reporting donations, while media reports say prosecutors are also looking into the possibility of illegal activity by Ozawa himself.

Party kingpin
Despite the threat to voter support, Hatoyama has stood by Ozawa, a kingpin who wields huge influence in the party and is hailed for masterminding an election victory last August that ended a half-century of almost unbroken conservative rule.

Some analysts say prosecutors are pursuing Ozawa to foil the party’s reform agenda, which includes reducing bureaucrats’ control over policies.

“The public prosecutors are seen as the Knights Templar, if you like, of the Japanese bureaucratic system,” said Mark Burges-Watson, COO of research company Japaninvest.

“So if anyone is going to come out fighting the DPJ (Democratic Party of Japan), it’ll be them.”

But a showdown could hurt Hatoyama, who has already come under fire this week for having urged Ozawa to “fight on”. Media and the opposition said the remarks suggested bias against prosecutors, although Hatoyama has denied this.

On Wednesday, Hatoyama was also forced to rule out the possibility of the government soon proposing a bill to require that interrogations by police and prosecutors be videotaped, as long advocated by human rights activists.

While the party endorsed the idea in the past after forced confessions led to the convictions of people later found to be innocent, Hatoyama said submitting legislation now could be seen as putting pressure on prosecutors.

Some tabloids have rallied behind the Democrats’ criticism of prosecutors, but mainstream media are unsympathetic, calling for a more detailed explanation to the public from Ozawa himself.

“The Democrats could just end up further irritating prosecutors and having the public wonder if politicians are trying to interfere with prosecutors’ work,” said Mikitaka Masuyama, professor at the National Graduate Institute for Policy Studies. “The Democrats are not being good at damage control.”

A team of more than 100 police and weapon experts sorted through more than 145 crates of cargo, initially labeled drilling equipment, at an air force base in northern Thailand, four days after the transport plane made an unexplained stop in Bangkok.

“Authorities found various kinds of weapons including rocket launchers, rocket-propelled grenades and components for surface-to-air-missiles,” Sirisak Tiyapan, head of international affairs at the Office of the Attorney-General, told Reuters.

“Experts will inspect further. That could provide clues in terms of who might want this sort of weapons, where they might be going, and where they were produced,” he added.

A Thai court extended the detention of the five-man crew – four from Kazakhstan and one from Belarus – by 12 days to give the authorities more time to investigate.

They each face 10 years in prison if found guilty of illegal possession of heavy weapons.

Mystery continued to surround why the plane landed in Bangkok on Friday and the circumstances which led to the seizure of the cargo. Crew members denied knowledge of any weapons on board and indicated that the plane stopped en route to Sri Lanka and the Middle East to refuel and fix a wheel.

The weapons could be in breach of a U.N. Security Council resolution in June banning communist North Korea from selling weapons in response to its defiant nuclear and missile tests.

South Korea impounded four cargo containers in September under the same resolution and analysts said the latest seizure could complicate the North’s clandestine arms trade and pressure Pyongyang to return to the negotiating table.

Thai media has speculated the cargo plane may have been forced to land by Thai fighter jets following tip-offs by the United States, which was monitoring the plane’s movements.

The government has not commented on the reports.

Arms exports to Middle East
Thawil Pliansri, secretary-general of Thailand’s National Security Council (NSC) which advises the government, said officials were yet to determine the destination of the cargo. He did not say why the plane landed in Bangkok.

“We didn’t want it to land here,” Thawil said. “We had tip-offs that this plane might be carrying something illegal so we asked to search it. We had to in order to comply with the (UN) resolution.”

An NSC official, who declined to be identified, told reporters authorities were acting on US intelligence.

Arms are a vital export item estimated to earn North Korea more than $1bn a year. Its biggest arms sales come from ballistic missiles, with Iran and Middle Eastern states among their customers, according to US officials.

Analysts said the cargo seizure would increase the cost, and risk, of buying arms from North Korea, which could force Pyongyang to consider rejoining stalled nuclear talks in the hope of receiving aid.

“This is a tremendous blow to North Korea’s very crucial revenue source,” said Baek Seung-joo of the Korea Institute for Defense Analyses. “Who would give business to a courier service, for example, that won’t deliver?”

“[This] points to a greater likelihood that the North will look to dialogue with the United States and also the six-party talks as a way out.”

Speaking in Washington, US Secretary of State Hillary Clinton said the seizure was a sign that sanctions on North Korea were working.

“And it shows that the international community, when it stands together, can make a very strong statement regarding what we expect from a state like North Korea,” she told reporters.

Villagers here plough their narrow, terraced fields dug into the brittle slopes much as they have for generations, with wooden ploughs and donkeys. But the seemingly timeless rhythms of this village in Yongjing County, Gansu province, have been changing.

Over the past 20 years, summers have become hotter and drier, rains now come later and droughts more often, and winter now sets in late and mild enough so farmers can grow corn, which would not mature here 10 or more years ago, said Pu Yanjun, resting at midday from ploughing his soil before winter.

“Water is our biggest problem, Gansu, they say, has nine years of drought every 10 years,” he said, hunkered over a lunch of flat bread and potatoes in his neat courtyard home.

“Now the rain often doesn’t come when we need it, and then it rains when we don’t need it. If it rains now, it will be useless anyway.”

The threats from climate change for areas such as Zhongzhuang are at the heart of negotiations 6,843 km (4,252 miles) away in Copenhagen, where leaders will be locked in talks this week seeking a new international pact on fighting global warming.

Greenhouse gases from human activity are trapping more solar heat in the air, feeding planetary warming likely to stoke droughts, disrupt rainfall, and threaten crops in many areas.

For China, with its 750 million strong farming population, such changes could strain food security in coming decades. Poor villages in environmentally stressed areas such as Yongjing County are likely to suffer first and worst.

“Once you get into the remote communities in poorer parts of China, people are very exposed to climate hazards,” said Declan Conway, an expert on climate change and agriculture at the University of East Anglia in Britain who has studied what could happen to China’s farmers.

“Those people are already quite vulnerable, and it’s quite likely that with an increase in the frequency of extreme weather events, they’re going to feel it more in the future”.

No meat this year
For Ma Tuili, a 25-year-old mother, the pressures of this harsh landscape come down to the buckets of water she hauls from the family well each day, measuring them out so supplies last her family of five through the usually dry winter until rain arrives.

She and the 100 or so other residents of Zhongzhuang are mostly Hui, a Muslim group ethnically close to the country’s majority Han Chinese people. They grow wheat, potatoes, and corn, and herd goats and occasionally cattle.

Their daily diet is potatoes, flat bread baked on the side of stoves, and noodles. Meat is a luxury many said they ate perhaps two or so times a year, during the Lunar New Year and Muslim festival of Eid. Ma said a bad harvest and debts accumulated last year had made even that impossible.

“We didn’t have meat for the (Lunar) New Year this year, so I fried dough balls instead,” she said, between bouts of heaving water from the well. “I was thinking, ‘Why can other people eat well but we can’t?’ We work hard here, but we don’t get rich.”

Farmers said fields here produced about 100 kg of summer wheat per mu (one sixth of an acre or 0.0667 hectares), less than a third of the national average, on family plots of two or three mu. Most said their families earned between 2000 yuan and 3000 yuan a year – some much more – skidding close to outright poverty, especially in bad years.

The changing climate has been making it harder for them to climb out of poverty, despite government programmes to raise incomes and improve water availability, found a recent study of Yongjing and other vulnerable parts of China sponsored by Oxfam and Greenpeace.

“There’s less rain than before. The droughts have been getting worse,” said Cai Wenfu, a 20-year-old farmer, resting after coaxing a braying donkey to finish ploughing a plot.

“The hardest part of life is not having enough rain so there is not enough to eat. It’s not like that every year, but we were down to two meals of bread a day in the last bad drought.”

The study found that since the 1980s, average temperatures here have risen, rain has decreased, and droughts are more frequent. Average annual precipitation was 323 millimetres in the 1970s; between 2008 and 2008 the average was 279 mm.

“There’s an association between these changes and reversion to poverty,” said Lin Erda, one of China’s top experts on climate change and agriculture, who helped write the study.

“There are uncertainties about how global warming will affect agriculture, but the risks are big, and they will first hurt the farmers in arid and semi-arid vulnerable regions”.

Without potentially expensive adaptation through improved irrigation and improved crops strains, average productivity of major grains per every acre of land planted could fall between 13 and 24 percent in coming decades, said Lin, who works at the Chinese Academy of Agricultural Sciences in Beijing.

In Zhongzhuang, the hazards of weather did not act alone, but rather in league with illness, debt, or family problems.

Cai Yanguo said the family’s main well ran dry last year and they had to borrow money to buy water trucked in. She had not heard from her husband, away working, for many months and her daughter, Cai Wenlan, now 14, quit school for lack of money.

A neighbour, Cai Yanming, said his family of four could not afford proper medical care for his wife, Fa Tumei, suffering from a bad spine and painful abdominal problems.

“We’re running out of money. I don’t want to go away for work but there’s no choice,” said Cai Yanming, a slight, haggard 37-year-old.

Learning to adapt
China’s leaders, too, are openly worried about global warming threatening efforts to cut poverty and maintain food security.

The country’s grain production has recently reached record levels, despite damage from droughts, floods and frost. In 2008, China enjoyed a fifth straight year of bumper harvests, with grain output at a record 525 million tonnes.

But China’s top meteorologist, Zheng Guoguang, has warned that global warming raised the risk of a stretch of bad weather that could be disastrous for the world’s most populous nation.

In October, Premier Wen Jiabao, who will go to the Copenhagen summit later this week, visited Dingxi in Gansu, near to Yongjing, and warned of the environmental strains and water shortages threatening the region’s farmers.

The government in Yongjing has promoted building wells that trap rainwater and help families endure dry seasons and drought. Wealthier villages use plastic sheeting to keep more moisture in the soil, and experts are promoting drought-resistant crops.

While wheat crops have been buffeted by drought in recent years, the warmer autumns have allowed farmers to shift to corn, which is planted and matures later.

But biggest adaptive step China’s farmers are likely to take is moving away to towns and cities to find work, poorly paid but with better prospects than eking a living from the dry land.

“Everyone is forced to go out to work, even if you’re not willing to. I’m older but I also have to, said Zhang Dezhong, a man in his 50s who said he had found work digging on road works.

Like most WTO members, China has not yet joined the GPA, which requires a separate negotiation process. Members of the sub-group, mostly wealthy developed countries, pledge to give each other reciprocal access to government tenders and purchases.

People who have seen China’s revised offer say a space has been left blank under the heading “sub-central government entities”, which is supposed to outline the levels of government that must abide by the agreement.

China pledged to make an offer to join the GPA last year at a Sino-US summit, after an initial proposal in 2007 was rejected as inadequate by other member countries.

The revised offer is much more acceptable to trading partners, with a five-year phase-in, instead of 15 years, and more central government bodies covered by the agreement.

“I don’t see the entry as being altogether smooth. A lot of negotiation will still be needed, but altogether, the environment is so much better than when China entered the WTO,” said Zheng Zhihai, the vice chairman of the China Society for WTO Studies, under the Ministry of Commerce.

“At the end of the day, it will go through because it suits the interests of both sides.”

European, American and Japanese firms are lobbying for an open Chinese market and, in theory, joining the GPA would be to China’s benefit by granting reciprocal access in those countries.

But in practice, the benefits of the GPA for Chinese firms would be limited, since their biggest projects are in developing Middle East and African countries which are not GPA members.

Lower-level bodies not included
Trading partners are dismayed that lower-level government bodies or state-owned enterprises are not included in China’s initial offer.

State-owned enterprises, a hybrid between a government-run body and a competitive corporation, are also not currently included in China’s GPA offer.

Many SOEs, like Baosteel or PetroChina, have actively sourced foreign equipment and technology during upgrades to international standards. But negotiators may be more concerned about insular state-owned monopolies like the State Grid Corp., which function more like government arms.

The initial threshold for the size of deal that must be open to outsiders is also higher than that of other GPA members.

China’s provinces have in the past imposed restrictions on buying goods made in other provinces to protect local producers.

Unlike China’s hard-fought entry into the WTO, spearheaded by the Ministry of Commerce, talks on the GPA will be led by the Ministry of Finance, due to its authority over the state budget.

In practice, government bodies tend to actively buy foreign goods, since officials often feel the guaranteed quality offsets the higher price, said Tu Xinquan, a WTO specialist at the University of International Business and Economics in Beijing.

“The issue for government negotiators is that right now I voluntarily open. But the GPA would force me to be open,” Tu said. “That could limit the government’s freedom of action.”

The lost policy latitude would include initiatives like “indigenous innovation” regulations, designed to support Chinese firms entering the high-tech sector or moving up the value chain.

Those alarmed foreign companies as they encourage government bodies to preferentially source Chinese-owned and manufactured technology, goods and services.

Uzbekistan powered through the global economic crisis, kept inflation in check and is enticing foreign companies with a $50bn investment bonanza.

But Said, like many in Tashkent, places no faith in this government data.

He says the only way he can make a living since the state stole his thriving retail business is to drive a taxi along the capital’s leafy boulevards, past stores selling Western fashions he cannot afford. “This looks like heaven,” he says. “But it feels like hell.”

Factories have closed and doctors at one Tashkent hospital say they haven’t been paid for five months. President Islam Karimov tolerates no dissent in Uzbekistan, a landlocked ex∞Soviet country lying on gas reserves coveted by Asia’s powerhouse economies and a transit route crucial to US military operations in neighbouring Afghanistan.
Karimov, 72, has ruled Uzbekistan for nearly two decades. There is no opposition party and the absence of any obvious successor breeds rumour and fear among the 28 million population. “His frame of reference is the Soviet Union and he doesn’t want to become another Gorbachev,” said one foreign diplomat, referring to reforms introduced in the 1980s by Kremlin chief Mikhail Gorbachev that preceded the Soviet Union’s collapse.

The government argues its command- style economy has shielded Uzbekistan from the global financial crisis. Gross domestic product grew by 8.1 percent last year and is set to expand by 8.5 percent in 2010, while inflation has hovered between six percent and eight percent in each of the last five years. Uzbekistan’s economy operates on at least two levels, however. The layman’s formula for calculating economic progress is to double the official inflation rate and halve GDP growth.

A quarter of the population lives below the poverty line. The Asian Development Bank estimates almost 60 percent of those employed live on less than $1.25 a day, a rate surpassed among the bank’s members by only Nepal and East Timor. Furtive, black market trades in Tashkent’s bazaars value the Uzbek sum at nearly 50 percent below the official rate of 1,560 to the dollar. Locals say the state even regulates the black market and that secret police are watching every transaction.

In a country where the largest banknote, 1,000 sum, is officially worth 65 cents, carrying cash can be unwieldy. Local residents, who almost always decline to be identified for fear of reprisals, say there is a physical shortage of banknotes.

Economic showcase
Uzbekistan, which ranks among the world’s top 10 producers of gold and uranium, had a rare opportunity to showcase its economy in May when it became the first Central Asian country to host the Asian Development Bank’s annual meeting. First Deputy Economy Minister Galina Saidova told a packed room of investors about a $55bn investment plan between 2009 and 2014. The state budget has been in surplus since 2005 and forex reserves have grown sixfold in the last five years, she said.

Several large international companies have already arrived. Chevrolet cars from the General Motors Uzbekistan joint venture are ubiquitous on Tashkent’s eight-lane boulevards. German truck maker MAN is assembling trucks in the city of Samarkand and Malaysian state oil and gas firm Petronas is leading a project worth between $2bn and $3bn to convert Uzbek gas into diesel and other liquid fuel.

Foreign investors like stability, and Karimov shows no sign of relinquishing control. Asked on a recent trip to Moscow about the repercussions of the April uprising in Kyrgyzstan, he said: “Take it from me: in Uzbekistan, no∞ one is delightedly following the actions of the ‘freedom-loving’ Kyrgyz people.”

The overthrow of Kyrgyzstan’s president has stirred tensions in Central Asia. Months after the previous Kyrgyz revolution in 2005, Uzbek troops fired on protesters in the eastern city of Andizhan, killing hundreds and drawing international rebuke.

Few in Tashkent expect a repeat. A human rights worker who recently visited Andizhan said wounds there are still too raw. Others say the country – with a population more than five times that of Kyrgyzstan – is too large and too disparate to attempt any sort of revolution. “They have a higher threshold for abuse,” a diplomat said.

The succession question
Karimov has said strict measures are needed to prevent the spread of Islamist militancy. Police with explosive detectors and sniffer dogs have patrolled Tashkent’s metro since the suicide bombings at two Moscow underground stations in March. Suicide bombers have targeted Tashkent before, including the US embassy in 2004. But rights groups say Karimov has used this threat as a pretext to eliminate dissent and religious freedom in the mainly Muslim country.

Surat Ikramov, who describes himself as a human rights defender, painstakingly records the abuses related by growing numbers of visitors to his office in a low-rise Soviet apartment block. He flicks through a dossier of the worst cases. “Beaten. Beaten. Dead,” says the 65-year-old former teacher, pointing at photographs of the victims. “This one was a taekwondo champion. This one was too religious. This one,” he said, picking out a bruised, bandaged face, “is me.”

Ikramov says he was beaten and poisoned by masked agents for opposing the government. He says people still live in fear of a state where crimes can quickly be invented to quash a threat or expropriate a successful business. “We have everything here to live well: gas, oil, our own food products – you name it, we have it,” he said. “So why do we live like this?”

The financial elite is not exempt. Tashkent was abuzz with rumour after the arrest two months ago of several prominent businessmen. Though all were released, locals say the gesture was a timely reminder of the president’s absolute rule. “The arrest of the ‘oligarchs’ shows that the government does not want any group to become too powerful,” said one.

Opponents do not expect change anytime soon. The president’s civic power is growing in the grand buildings of Tashkent, such as the ice-white convention centre constructed beside the square honouring 14th-century Turkic warlord and national symbol Amir Timur. “The West wants three things: support for Afghanistan; transit for oil and gas; and crushing the terrorists of whom the West is so afraid,” a Tashkent resident said. “Karimov provides all three.”

But Karimov’s age – at 72, he is Central Asia’s oldest incumbent leader – raises questions about the eventual transfer of power. With no clear succession, the spectre of a turbulent upheaval lingers. “Some believe Karimov’s death will bring about the apocalypse,” said another Tashkent resident. “But you could just as easily argue this is an illusion he himself has created.”